The Difference Between Consumer and Non-Consumer Debts

What Lies in Your Debt?

It’s imperative that you know the difference between consumer and non-consumer debts and how each may affect your credit and your lifestyle. The difference in the two types of debts lies in the manner they’re treated when it comes to taxes, annual percentage rates, terms of agreement and collateral you may offer.

A non-consumer debt is usually covered by an asset which is expected to appreciate in value, such as a home. The asset acts as collateral for the loan you receive from a lending institution, meaning if you don’t pay back the loan, the lender can sell the property and retain the money received.

APRs (annual percentage rate) are usually much less for non-consumer debts because they’re less risky for the lender. APRs usually coincide with the risk the lender is taking if you fail to pay back the loan and if there is collateral for the loan amount, the risk is minimal.

Interest on most non-consumer debts are usually completely tax deductible and you can take off the amount from your taxes owed each year. Also, most non-consumer debts usually offer a fixed term agreement on the loan, meaning that you have a set time to pay off the debt and can plan better for this fixed amount and timeline.

Consumer debts are usually considered bad debt because you’re purchasing items based on no collateral and can keep adding to the debt and paying the accrued interest. Credit cards are the most common type of consumer debt, but auto loans or other major purchases are also considered loans for general purposes.

The interest on consumer loans is usually not tax deductible and can run up your debts to exorbitant amounts in a hurry because of high interest rates. Sometimes the rates change and can run as high as 30%.

Consumer debts usually have no set time to pay off the amount owed and this is a great situation for the lenders because the rates ensure that you’re paying off the purchases for years and paying them extra in the meantime.

Credit card consumer debt is dangerous to the borrower because it’s not fully understood. Remember that you’re only required to make a minimum payment on your balance (perhaps 2 or 3 percent).

If you have a $1,000 balance on a card at the end of the month, you may only have to pay $10 or $15 in payment. In fact, the interest on those purchases might exceed your payment amount. Make an effort to pay off credit card balances each month to avoid paying high interest rates. Never charge more than you can pay with cash if needed.

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