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The word debt can be bad, but not all debt is bad. Some types of debt, such as student loans and mortgages, allow you to use leverage to help you better your financial future. You can take advantage of cheap financing with their low interest rates.
Toxic debt is a loan that has a high interest rate and is on the other end of the spectrum. Toxic debt is debt that has little chance of being paid back with interest and can be toxic to both the lender and the borrowers.
The loan will usually cost you more than the value of the loan, according to the financial advice manager for personal finance app Albert. There are examples of predatory loans that are characterized by unreasonable fees and payments.
When you're in a pinch for cash and need a quick fix, you can get a payday loan, but its interest rates are high and it's not an easy fix. In some states with no regulations, you can get a short-term loan of a few hundred dollars and pay 500% in interest over the course of a few years.
Toxic debt can wreak havoc on your finances without you even realizing, so we share signs you might already have it, plus tips to avoid or get out of it.
The balance continues to grow because of a high interest rate, but are you making consistent payments towards your debt obligation? This is a sign that your debt is toxic and will leave you stuck paying off a forever accruing balance and never actually getting rid of the debt entirely.
If your debt-to-income ratio is high, that's a second sign. The ratio shows how much debt you have. A high debt-to-income ratio means that more of your paycheck goes toward paying your debts.
Divide your total monthly payments by your gross monthly earnings to calculate your debt-to-income ratio. You can see how it all adds up quickly by taking the interest rate you pay on your debts into account.
You will want to take immediate steps to pay down your debt if the ratio is high.
It's obvious that you should try to avoid toxic debt, but it can be difficult.
If you find yourself in a situation where you have an immediate need for additional cash, first ask a family member or trusted friend to borrow money and then create a repayment plan with them.
A bank or credit union can be used to take out a personal loan. Personal loans have lower interest rates than credit cards, and consumers can use them to finance nearly every kind of expense or consolidate debt.
LightStream has some of the lowest-interest loans we found when ranking the best personal loans, ranging from 3.49% to 19.99%. On a weekday, borrowers can receive their funds on the same day if they apply and are approved. The loan term lengths range from 24 to 144 months.
LightStream requires applicants to have good credit or higher, but there are personal loans for those with bad credit as well. Select's top picks are listed here.
If the above options aren't feasible, you could use your credit card to get a cash advance. If you can't afford to pay off a loan with a credit card, it's still less expensive than taking out a loan with a high interest rate.
In this scenario, you should talk to your credit card company about lowering your interest rate. The U.S. Bank Visa Platinum Card has an introductory rate of zero for the first 20 billing cycles. This is one of the longest interest-free periods for balance transfers. If you have a long introductory period, you should be able to pay off your debt within that time frame.
It's important to create a plan to repay the debt with all of these options.
Take steps to eliminate toxic debt completely if you already have it. Talking to a credit counselor can help you explore your options. You can take advantage of the credit counseling programs of nonprofits for free or at a fixed rate. You will not pay high fees to meet with a financial advisor.
You can find an accredited credit counseling organization in your area by searching for it on the website or by phone. You can call or search on the website if you want.
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