The pandemic forced many Americans to borrow money to cover unexpected expenses. While this isn’t shocking, the amount people borrow is—the average personal loan is $9,928. Last year also marked the return of credit card debt. The average household’s card balance reached $8,006 once the dust cleared from the holiday shopping. That’s quite a bit of debt to saddle. But if you’re going to take on debt, is one type better than the other?
Good Debt vs. Bad Debt
“Good” debt is money owed for things that can help build wealth or increase income over time, such as a mortgage, student loan, or business loan. “Bad” debt is considered something that does little to improve your financial outcome, such as unpaid credit card balances. Figuring out which debt to carry can help you build credit without damaging your credit score. Let’s take a deeper dive into ways you can borrow money and the possible ramifications of each.
Auto Loans
When debating whether auto loans are good or bad debt, consider the practical value of your purchase. While leasing a car isn’t a good option for most people (it’s a never-ending payment cycle with no equity), a low-interest auto loan makes sense if you’re planning on keeping it past your loan period. Our loan specialists can help you make a plan that keeps you on the upside of your auto loan.
Quick Cash Loans
Payday loans and cash advances are attractive at first glance. These shops are on every corner and advertise quick and easy access to cash. But at what cost? High-interest rates, typically 300 to 500% APR, are often hidden, and the ballooning payoff is usually due in three to four weeks. Your $500 loan may wind up costing you $2,500. CPS IBEW FCU members have access to better options, including fast cash loans and Skip-a-Payment offers.
Credit Cards
Credit cards can also provide a quick fix when cash is tight. It’s essential, however, to know how to use them. Avoid the tempting cash advance option that carries a high APR and pay your balance monthly. If you already have credit card debt, consider transferring your balance to a CPS IBEW FCU Mastercard to save money while you pay it down.
Personal Loans
For more significant cash needs, a personal loan can be a wise choice, particularly personal loans that offer fixed payment terms over the life of the loan. Personal loans can be used for auto repairs, home repairs/remodeling, health expenses, education costs, and more. When the alternatives are falling behind on your bills or running up your credit card balance, consider a personal loan. When the need for cash arises, you have options—some are just better than others. Consider whether you will be taking on good debt or bad debt, and remember to contact us with questions.
