Points to Ponder Before Taking on Debt

By The USAA Educational Foundation

Having debt has become a way of life in America.

According to the Federal Reserve System report on Consumer Credit, total outstanding consumer debt in the U.S. reached a total of $3.64 trillion in July 2016.

But just because we’re sinking further as a nation doesn’t mean you have to join the crowd. Avoiding debt is sometimes as simple as thinking before you decide to take it on. Here are some key points to consider that might help you avoid being part of the statistics:

  • Repayment terms. How long will it take to pay off the debt? It can be tempting to stretch out the repayment terms of debt just to make the payment lower – especially with vehicle loans – but this is typically a bad idea. In most cases, the longer you take to pay, the more you pay in total. Shorter repayment terms are typically better.

  • Interest expense. What will the total cost of the debt be by the time you pay it off? And by direct association, how much will the purchase you made using the debt end up actually costing you? For example, if a $1,000 TV charged on a credit card ends up costing you $250 in interest by the time you pay it off, you effectively just paid $1,250 for it. Would you ever walk into a store and intentionally pay more for something than the marked price?

  • Future income. Even if you can afford a payment today, are you fairly certain you’ll be able to keep making the payment until the debt is paid off. What will you do if the payment is no longer affordable at some point?

  • Future situation. Life changes, and what looks like a good decision today might look like a terrible one 3 or 4 years from now. For example, servicemembers taking on vehicle loans should think about how they would handle a PCS to a location where the vehicle can’t be taken or where taking it wouldn’t make sense. What if it couldn’t be sold at that point for what’s owed on it?

While these simple questions aren’t guaranteed to save you from all bad debt decisions, taking the time to ask them before you take on debt certainly can’t hurt.

The USAA Educational Foundation, a nonprofit organization, does not endorse or promote any commercial supplier, product, or service.

 

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