What is “Toxic Debt”? An expert discusses warning signs and tips for avoiding expensive debt – CNBC | Vette Leader

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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 significantly high interest rate (usually an interest rate above 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,” Trina Patel, financial advisory manager for personal finance app Albert, tells 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, as well as tips for avoiding or getting out of toxic debt.

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Signs that you may already be in toxic debt

Tips to avoid or get out of toxic debt

LightStream Personal Loan

  • Annual Percentage Rate (APR)

    3.99% to 19.99%* when you sign up for Autopay

  • loan purpose

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

  • loan amounts

  • conditions

  • credit needed

  • incorporation fee

  • Penalty for Early Payout

  • late fee

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 purchase a low-interest credit card or a credit card with a 0% APR introductory period, such as the US Bank Visa® Platinum Card, which offers one of the best overall APR introductory periods: 0% for the first 20 billing cycles for balance transfers and purchases (16.74% to 26.74% variable APR thereafter; cardholders must complete fund 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 timeframe 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

    16.74% – 26.74% (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

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.

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