Personal Debt
Personal debt is the amount an individual or legal entity owes within the scope of utilizing credit funds or deferred payment for services, goods, tax obligations, alimony, etc. This means that personal debt encompasses the money borrowed from a bank or other financial institution and any other debt arising from various circumstances. The amount of debt is always precisely defined, including the conditions for repayment, refinancing, deferment, etc. It’s crucial to understand all aspects of where personal debt can originate, how to manage it properly, and how to avoid unpleasant situations where it grows rapidly. Responsible debt management leads to a positive credit history, the ability to hold executive positions and those with increased financial responsibility, obtain new loans with lower interest rates, rent the desired property, and more.
Personal debt represents money spent before the borrower possesses it. Any borrowed funds must be repaid under pre-defined written, certified, or oral agreements. Failure to repay the debt can lead to negative consequences, including the potential risk of property seizure, restrictions on driving rights, disqualification from holding certain positions, and even imprisonment if personal debt reaches a critical level (e.g., in the case of regular tax evasion).
Types of Personal Debts
- Credit card debt. This occurs when a bank customer spends not their money but the funds available through an open credit line.
- Student loan debt. Covering college tuition, book expenses, campus housing, and other educational costs through a student loan. Typically, such lending programs offer grace periods and favorable repayment terms.
- Mortgage. Sometimes, purchasing property through a mortgage loan is more beneficial than renting. However, mortgage payments must be regular since the property often serves as collateral. Similarly, auto loans work under the same principle. Both are advantageous if the borrower responsibly handles their financial commitments.
- Unsecured loan. It is a loan without collateral provided by a financial institution to cover any personal needs (medical expenses, vacation, urgent repairs, etc.).
Personal debt can accumulate if a person takes a new loan without fully settling the previous one. This situation can be exacerbated by a lifestyle where one consistently spends more than they earn, sets no financial goals, lacks an emergency fund, and consequently becomes overly dependent on credit cards. Unexpected expenses, such as accidents, illnesses, job loss, and other force majeure events, can also negatively impact personal debt. Late debt payment leads to accumulation and increases the total debt amount due to monthly interest charges and additional expenses related to regular obligations: utility bills, taxes, etc.
How to Manage and Reduce Personal Debt
To avoid damaging your credit score and even use it as an opportunity to improve your credit history, it’s essential to develop a debt repayment strategy. Start by creating a budget — determine the maximum amount you can allocate for debt repayment each month. Consider using any additional income (part-time or freelance work, selling unnecessary personal items). Additionally, you can use the snowball method by paying off the smallest debts first and then moving on to larger ones. This approach boosts motivation and helps you manage debt faster. If you have debts that accrue interest, prioritize paying off the most expensive one first. In difficult situations, negotiate for debt restructuring, a freeze on the debt (where penalties are not applied for a certain period), or consider debt consolidation (combining several loans into one with an optimal interest rate).