Warning signs of toxic debt and how to avoid them

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The word debt can often have a bad connotation, but not all debt is necessarily “bad.” Some types of debt, such as B. student loans and/or mortgages, allow you to use leverage to improve your financial future. In addition, the low interest rates allow you to benefit from cheap financing in the long term.

At the other end of the spectrum is what we call “toxic debt.” Unlike low-interest debt, toxic debt is a loan issued at a very high interest rate (usually an interest rate in excess of 30%). In other words, toxic debt is debt that has little chance of being repaid with interest — a trait that can be particularly toxic for both the lender and the borrower.

“The loan typically costs you significantly more than the value of the loan amount,” says Trina Patel, financial advisory manager for the Personal Finance app Albertsays Select. Examples include payday loans or loans from predatory lenders that are characterized by unreasonable fees, interest rates, and payments.

If you’re short on cash, payday loans seem like an easy solution as they can be a quick way to get the money you need, but their interest rates are exorbitantly high. In some unregulated states, you may be paying more than 500% interest on just a few hundred dollars’ short-term loan, which will quickly add up over time if you can’t pay off the balance.

Because toxic debt can wreak havoc on your finances without you even realizing it, below we share the signs that you may already have it and tips for avoiding or getting out of toxic debt.

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Signs that you may already be in toxic debt

Are you making constant payments on a debt obligation, but the balance keeps growing due to a high interest rate? Patel points out that this is a sign that your debt is toxic and you’re stuck with paying off a perpetual balance and never completely getting rid of the debt.

A second sign, Patel suggests, is whether you The debt to income ratio is high. This ratio shows how much debt you have in relation to your income. While a low debt-to-income ratio indicates you’re earning more than you owe, a high ratio means more of your paycheck is being used to pay down your debt.

To calculate your debt-to-income ratio, divide your total monthly payments (credit card bills, rent or mortgage, car loan, student loans, payday loans) by your gross monthly income (what you earn before taxes and other deductions each month). ). Of course, this calculation takes into account the interest rate you pay on your various debts each month, so you can quickly see how it all adds up.

“The higher the ratio, the greater your debt obligation, and you should take immediate action to pay off your debt,” says Patel.

Tips to avoid or get out of toxic debt

It’s obvious that you should try to avoid toxic debt at all times, but that’s easier said than done.

If you find yourself in a situation where you urgently need extra cash, Patel recommends first asking a family member or trusted friend to borrow money and working with them to create a repayment plan.

Another option is to complete one Personal loans through a bank or credit union. Personal loans often have lower interest rates than credit cards, and consumers can use them to fund almost any type of expense or consolidate debt.

Luminous fluxFor example, offers some of the lowest interest loans we’ve found on our Best Personal Loan Rankings, with a fixed APR of 3.49% to 19.99% when you sign up for Autopay. Borrowers can even get their funds on the same day if they apply and are approved by 2:30 p.m. ET on a weekday, and the loan terms are among the longest on offer, ranging from 24 to 144 months.

LightStream Personal Loan

  • Annual Percentage Rate (APR)

    3.49% to 19.99%* when you sign up for Autopay

  • loan purpose

    Debt Consolidation, Home Improvement, Auto Financing, Medical Expense, Wedding and others

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  • credit required

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While LightStream requires applicants to have good or better credit, there are also personal loans for those with bad credit. Here are Select’s top picks:

Finally, if the above options aren’t practical, you might consider using your credit card, whether through a simple swipe or through a cash advance (cash advances usually have a fee of around 5% or more, note that’ll get you started to be charged interest immediately on the cash advance). Although credit cards have some of the highest interest rates, taking out a payday loan that you can’t afford to pay back is still cheaper than what you would pay.

In this scenario, Patel suggests talking to your credit card company about lowering your interest rate. You can also get a low interest credit card or a credit card with a 0% APR introductory period like these US Bank Visa® Platinum card, which offers one of the best overall introductory APR periods: 0% for the first 20 billing cycles on balance transfers and purchases (15.24% to 25.24% variable APR thereafter; cardholders must complete balance transfers within 60 days of account opening) . This is one of the longest interest-free periods for both transfers and purchases. Ideally, with such a long introductory period, you can pay off your debt within that period and not have to pay any additional interest.

“With all of these options, it’s important to create a plan to pay off that debt,” says Patel. “I would also recommend reviewing your budget to see where you can cut expenses and start building an emergency savings fund so you can avoid doing this in the future.”

US Bank Visa® Platinum card

On the safe side of the US bank

  • Reward

  • welcome bonus

  • Annual fee

  • Introduction APR

    0% for the first 20 billing cycles on balance transfers and purchases

  • Regular APR

    15.24% – 25.24% (variable)

  • transfer fee

    Either 3% of the amount of each transfer or a minimum of $5, whichever is greater

  • foreign transaction fee

  • credit needed

Consider a credit counselor to help build good financial habits

And if you already have toxic debt, you should take steps to eliminate it completely. Patel suggests speaking to a first Loan advisor who can help you explore your options. The most reputable credit counseling organizations are not-for-profit organizations, and you can use their programs for free or at an affordable fixed price. You don’t pay high fees to meet with one like you might do with a financial advisor.

First, look for an accredited credit counseling center in your area on the FCAA website or by calling (800) 450-1794. You can also search on the NFCC website (Search by zip code below) or call (800) 388-2227.

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Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.