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Big-Ticket Debt

 

If you’re an American over the age of eighteen, chances are you have some sort of large debt. This might be a mortgage, auto loan, or student loan. In fact, you might have all three.

In our continuing look at the personal debt problem, we’ve explored what constitutes bad debt, and the glut on non-essential spending. Home, auto, and student loans are, for the most part, considered to be “good” debt. Really all this means is the debt doesn’t usually harm your financial life. As in all things, there are always exceptions.

Today we’re going to look at the large debts most have, explore trends in recent years, and learn when these non-harmful debts can turn toxic.

Mortgages

The largest single item many will buy is a home. Since 2018, interest rates have fallen allowing borrowers to make the most of their buying power. Mortgage borrowing rose last year by $31 billion to over $9 trillion. Mortgage delinquencies are flat and only a low 1.1 percent are late by over ninety days.

The median purchase price of home in 2017 was $235,000 with a 10 percent down payment. That adds up to a loan of $211,500 making their monthly mortgage payment somewhere between $1,022 to $1,500 depending on the term and interest rate.

Yet, nearly 40 percent of adults would have to borrow money, sell something, charge it, or would simply be unable to cover a $400 emergency. The increase in borrowing, low rates, and low delinquencies show the recovery of the housing market. But this reinforces the idea that American’s are “house rich, cash poor,” meaning their financial worth is tied up in their home.

Of course, the average cost of a home varies wildly depending on where you live. In San Diego, median home prices are more than double the average. Whereas Omaha, Nebraska housing costs are 25 percent less than the average.

And let’s not forget that the cost of a home isn’t as simple as calculating your mortgage payment. There are interest rates, closing costs, taxes, insurance, homeowner’s association dues (where applicable), and upkeep. When shopping for a home, and the mortgage that goes with it, make sure to consider these costs.

Student Debt

Student debt, specifically college debt, is a problem in the U.S.. Few would argue with that. There are roughly 45 million borrowers of around $1.5 trillion. This education debt has outpaced credit cards and auto loans in its growth. In fact, the rise of student-loan debt has been staggering… And unsurprising when you look at the numbers.

The average college graduate leaves school with $30,000 in debt. This has tripled since the 1990s. About half of all student loans are in deferment, grace periods, or in forbearance and not in a repayment cycle. If we discount those, 1 in 9 student loans are at least 90 days delinquent or in default. In fact, every day around 3,000 borrowers go into default. Those numbers would likely be twice as high if all loans were forced into payment.

It seems obvious why so many are overwhelmed by their student loan debt. And unfortunately, student debt is not discharged in normal bankruptcy. Borrowers must exhibit a “certainty of hopelessness” for this type of debt to be discharged.

In the first article of this series, we talked about education debts in relation to good and bad debt types. An education can, and usually does, increase your marketability in the hunt for a good-paying job. However, evidence suggests that graduates are not able to make good on the promise of higher pay their degrees imply.

Perhaps its expensive schools, advanced degrees, or rare fields that account for this. Or maybe it’s spending habits. We’ve seen many new graduates in high-paying career fields splurge on fancy cars and big houses fresh out of school. Research possible career paths, pay, and schools. In some cases, highly specific career paths require you to accumulate more educational debt as you continue to advance degrees—like masters and doctorates—that may not justify the additional debt in earnings potential. Similarly, if you attend an expensive, out of state school for your useful business degree, the cost of your loan could quickly toxic.

Auto Loans

The final piece of the large debt puzzle is an auto loan. Of the collective $13.95 trillion in household debt, a large portion is automotive. These loans have increased steadily since 2011, with 2018 hitting the largest level of auto loan debt in 19 years. Around $584 billion in new auto loan and leases appeared on credit reports in 2018. Last year, new auto loans totaled $159 billion.

While technically considered a bad form of debt, auto loans can be fairly benign. Even though a vehicle loses value the moment it leaves the lot, most need the transportation. If you get a low interest rate, buy within your means, and pay off your loan (preferably within five years), the impact is usually negligible.

Debt Doesn’t Have to Bury You

There is little doubt that personal finance and debt is a complex, and often daunting topic. Debts can feel suffocating. A personalized financial plan can help you plan for the future, and when considering purchasing a home, a car, or educational costs, determine what is possible.

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