Many Americans are grappling with debt right now, whether that means student loans or credit card bills. But despite being a normal part of life, debt can quickly spiral out of control if left unaddressed. And the last thing you want to do as a mother is to leave behind a huge debt for your relatives to pay off should the worst happen.
Before that happens, it’s important to educate yourself about debt and what it entails.
Here are 5 things moms should know about debt.
Debt isn’t always bad
Sometimes, debt can actually pave the way to financial freedom, provided you can pay on time, so interest doesn’t build up. Case in point: business loans. The Balance notes that overhead costs like new equipment and employee salaries tend to be too steep for small business owners to pay in full upfront.
By borrowing money, entrepreneurs get a shot at taking off without worrying too much about the initial capital. Once their revenue has stabilized, they can eventually pay down the business loan bit by bit. If you’re starting a home business or startup and you’re confident that you can profit from a loan and pay the principal back properly, remember that debt isn’t necessarily something to shy away from. Many moms have started their own businesses with great success after taking out a loan.
Not all debts are equal
Payment schemes and interest rates will vary depending on whom you borrow from and what type of loan you take out. A guide to personal loans by Marcus outlines how these types of loans are straightforward, versatile, and can be used for different purposes like debt consolidation, home improvement, and other big-ticket purchases. You’ll need to have a good credit score before you can borrow, however.
Meanwhile, a credit card cash advance is also a type of debt, but one that’s incredibly expensive and often thought of as a last resort. Business.com states that cash advances come with multiple fees and interest rates that are typically much higher than average.
Given these differences, you should read up on the types of loans before signing off on anything.
Rank your debts
There are two main types of debt: secured, which are loans that have assets promised as collateral, and unsecured, which is based on the borrower’s creditworthiness. As such, secured debts should take top priority in repayment to avoid losing anything important. Of course, this is only a general suggestion, and circumstances might force you to regroup — like when a debt collector obtains a court judgment, for instance. In the end, managing debt priority is key to minimizing the loss of assets.
Go federal for student loans
Whether you’re going back to school yourself or are preparing to send off your own kids, you need to know the best route to take when applying for student loans. A primer on federal student loans by the US Department of Education explains that interest rates for these are fixed and usually lower than private loans. Additionally, some federal loans can be subsidized, meaning the government covers the interest for you while you’re in school. However, the requirements to qualify are stricter compared to unsubsidized loans.
Paying debt is hard but doable
There will be days when you feel emotionally drained from all your financial obligations. But as we’ve said in our post on ‘How to Pay Off Debt Even When You Hit a Setback‘, this is a common and completely valid feeling. It’s important to remind yourself that there is a light at the end of the tunnel, and there are many ways to overcome your worries with the support of family and friends.
Everyone dreams of living debt-free, and the first step in achieving that goal is to inform yourself about debt. Hopefully, the points above will help you on your journey towards financial freedom.