Previously, we’ve looked at Credit Card Debt in detail. We also outlined steps for getting yourself out of debt. This is a continuation of debt discussion. In this post we’ll take a look at a few other common forms of consumer debts such as auto loans, purchase financing, and the less obvious – co-signer debt.
Other Consumer Debt
By other consumer debt I’m referring to auto loans, a variety of purchase financing options offered by retailers to entice people to buy now and pay later, and a less obvious, but potentially the most dangerous form of debt – co-signer debt.
As strange as it sounds, nowadays it’s uncommon to own your car outright. In fact it’s estimated that more than 70% of cars you see on the road are financed or leased (owned by banks or financial institutions, not people who drive them). For majority of Americans car payments are a fact of life and are a second largest expense after their mortgage, and for a lot of people these payments never go away.
When shopping for a car, there is a lot to consider: whether to lease or buy, whether to buy new or used. Personally, I would not recommend buying brand new cars since they depreciate 11% the moment you drive them off the lot and total ~ 20% the first year (Edmunds.com has a great infographic on this topic).
According to the same source a new car will lose over 40% in value over the first 3 years, that’s the sweet spot that I personally shoot for when looking for a “new” car, especially if there is extended warranty coverage. With that said, everyone’s situation is different and I can’t tell you when and what car you should buy, but hopefully I’ve given you some food for thought.
There are reasons why leasing might make sense, especially if you’re self employed or use your car for business, but that’s a topic for another time. In the meantime, i recommend you read this article on Edmunds.com that compares leasing vs. buying new vs. buying used.
These buy-now-pay-later financing options can cover almost anything including electronics, appliances, furniture, pets (yes, pets!) etc. Generally speaking, if you need a loan to buy a puppy, then you can’t afford that puppy. Two words – Delayed gratification. Put off buying something for a month and see if you still think you need it at the end of that month, in the meantime save up for it.
Things are not always that simple though, and you might need to replace an appliance, etc. Ideally, you should have enough cash in the bank set aside for a rainy day to cover that unexpected expense. In the absolute worst case, if you have to get a loan to finance your purchase, shop around for the best finance deal since there are loans with 0% introductory rates. If you are forced to go that route, make sure that you pay off that loan during the 0% time-frame to avoid paying interest.
Co-signer form of debt is potentially the scariest form of consumer debt since you have very little control over it and are not aware of the problems until it’s too late. It is a form of debt you take on when you co-sign someone else’s loan (i.e. student loan for a child, car loan for a friend, etc.).
All I’m going to say here is that if you co-sign for someone, you’re on the hook as if this is your debt or payment. Even if the primary signer makes all of his/hers payments on time, your credit and borrowing ability is still affected due to a new loan/payment you’re carrying. Read this bankrate article for more information
Some closing thoughts:
If you are struggling with any form of consumer debt, i recommend Dave Ramsey’s book on “The Total Make Over”. It will forever change the way you see debt and the way you handle your personal finances. It will give you a simple step-by-step guide of getting out of debt and getting your finances in order.
Disclaimer: I’m not affiliated with Dave Ramsey, and I don’t receive any proceed from the sale of his book. I’m merely recommending it for all those interesting in getting their finances in order.