What kinds of debt do we owe?
A look at the common categories of debt Americans encounter:
Almost everyone borrows money at one time or another, and it's not uncommon to hold several types of debt at once. But not all indebtedness is created equal. People use debt for many purposes, and creditors and the IRS can treat various types of debt differently. The type of debt will also determine the effect it will have on your credit score.
Debt can be broken down into two broad categories. Installment debt is meant for specific purposes and is paid back over a set period of time. Installment debt offers an opportunity to borrow money to pay for an expensive item or service that you otherwise wouldn't be able to afford. This kind of debt often comes with potential tax deductions and as long as you construct regular payments, doesn't negatively affect your credit score.
Examples of installment debt
Mortgages are used to buy homes, rental properties or other kinds of real estate. Banks typically issue loans with payoff schedules that last 15 or 30 years. That can be used to offer relatively low monthly payments, as well as lower interest rates than other consumer loan products. Most taxpayers can also deduct the interest they pay on their mortgage.
Auto loans generally have a term between 36 and 72 months. In most cases, you borrow a lump sum from a bank( even if you get your financing through a auto dealer) and pay it back with interest over day. The loan amount doesn't have to equal the full value of the car. For example, you may be able to offset the price by trading in your old vehicle or making a down payment.
If you have had to pay for higher education, you're likely very well known federal and private student loans. Federal loans are issued by the government and have relatively low intertest rates and offer fixed rates or new borrowers. Private loans come from banks and other private lenders who sets the interest rates and conditions of the loan. Taking out a student loan is an investment in education, typically with the is hoped that the government will pay off in accordance with the arrangements of a higher-paying task. And the interest you pay on the student loans is often tax-deductible.
Unlike mortgages, auto loans or student loans, personal loans can be used for a practically unlimited variety of major expenditures. For example, you might take out a personal loan to do a home redevelopment, take a once-in-a-lifetime tripe, move across the country or invest in a small business. Personal loans generally are not tax-deductible.
Many medical providers offer payment plans to help you afford specific medical treatments or procedures. Those that don't accept payments schemes will sometimes offer medical credit card, which often come with interest-free a time period of up to a year.
If you're unable to pay your taxes in full by the filing deadline, you'll owe the IRS money in the form of a tax indebtednes. You can arrange a refund schedule with the IRS.
Revolving debt, on the other hand, is taken on for no specific purpose and has no repayment time line- entailing it can last indefinitely. The most common example is credit card debt. If you carry a high amount of revolving debt relative to the amount of credit available to you, your credit score may suffer.
Examples of revolving debt
Credit card debt
You incur credit card debt when you don't pay off your monthly credit card bill in full. Interest rates vary dramatically, depending on your credit history and the overall interest rate environment, as well as what type of card you carry. For example, store-specific charge card often charge higher rates than your average Mastercard or Visa. It's possible to rack up debt on multiple credit card at once.
A home equity line of credit, or HELOC, is a type of revolving credit that uses your home as collateral. Like credit cards, HELOCs can be used to pay for all sorts of expenses. Since long-term failure to repay may result in the loss of your home, they should only be taken out if you are certain you can repay.