Broker Check
Taking a Step Towards Financial Wellness: Understanding Your Debts

Taking a Step Towards Financial Wellness: Understanding Your Debts

May 17, 2023

Understanding your debts is one of the most crucial steps towards attaining financial wellness.

Nearly everyone accrues debt at some point in their life and there are often very valid reasons for doing so.  Loans can make it easier to buy large items like a new car or a home.  Student loans are often incurred in pursuit of a career or when you wish to change careers. Credit cards are convenient, but if you can’t pay off the balance due each month, they are a quick way to fall into major debt.

Understanding how much you will borrow or have borrowed is only part of the equation, however. Good financial health depends on understanding how that debt impacts your life.

Secured Loan vs. Unsecured Loan

Simply put, a secured loan means the borrower has put up some collateral to promise repayment of the loan. If the borrower can’t make the promised payments, the lender can repossess the item that was put up for collateral. Homes and vehicles are the most common types of collateral for secured loans.

Credit cards are the most common type of unsecured loans. Because there is no collateral put up for an unsecured loan, there is nothing for the lender to repossess. Consequently, unsecured loans charge a higher interest rate.

Interest Rates

The interest rate on your loan will vary depending on the type of loan you are taking out. If you are buying a new home, you may pay 6-7% interest.  Interest rates on credit cards will be much higher, maybe 17% to as much as 30%.

Payment Timelines

Once your loan is approved, you will get a payment timeline that will tell you the minimum amount due, and the day your payment is due. Knowing when your bills are due and paying at least the minimum amount by the deadline is important to keep your credit score in good health. Even one late payment can affect your credit score by as much as 180 points.  It may not be possible for everyone, but if you can make two payments each month, you will reduce your debt faster and increase your credit score.

Create a Sustainable Plan to Manage Your Debt

Financial wellness starts with creating a plan to manage your debt. The first step is to create a budget that is realistic, meaning that you are living within your means and still able to pay your bills. There are methods to pay off your debts faster. As mentioned above, making two payments each month is one way. Try to make more than the minimum payment each month. If you owe multiple lenders, you may not be able to make two payments or afford more than the minimum on each loan but focus on the loans with the highest interest rates to make larger payments to save money in the long run. But be sure to make at least the minimum payment on each loan.

There are other strategies that you can use to get on the path to financial wellness. Compass Wealth Management is here to help you create an individualized plan.