Understand & Manage Debt for a Better Financial Future

At Traditions Bank, we understand that debt is a fact of life for many people, but not all debts are created equal. In this blog, we will explore what constitutes good and bad debt, the difference between secured and unsecured debt, and how to manage debt effectively to maximize wealth.

Good Debt: Supporting Borrowers with Affordable Loans

We believe that good debt is affordable and can be supported by the borrower. Whether a debt falls into this category depends on your financial situation. For many, this includes debts like mortgages, car loans, and home equity lines of credit (HELOC).

Take a HELOC, for example. A HELOC can be helpful as it allows borrowers to draw on the equity in their homes. At Traditions Bank, we work with our borrowers to ensure they are comfortable with their debt load and have the capacity to repay their loans.

Bad Debt: Overextension and Unaffordability

On the other hand, bad debt is debt that borrowers cannot reasonably afford. Consider credit cards. Even if credit card debt is affordable, it can still be considered bad debt as payment terms may be confusing. Making minimum monthly payments may not make a dent in the amount owed. If possible, try to pay off your credit card balance each month.

An indicator of the affordability of debt is your debt-to-income ratio, which compares debt load to income. However, it does not factor in living or discretionary expenses, making it challenging to determine what amount of debt could result in one living beyond one’s means. Our banking professionals can help you determine an accurate debt-to-income ratio to make a smart financial plan and avoid bad debts.

Secured vs. Unsecured Debt

There are two types of debts: secured and unsecured. Traditions Bank offers secured loans, such as mortgages, home equity loans and lines of credit, and car loans, where the borrower offers collateral to secure the loan. If a borrower defaults on a loan, the bank has the right to reclaim value from a piece of property such as a house or car. The primary source of repayment is your income, and the value of your collateral protects the bank in the event the loan cannot be repaid according to its terms. Interest rates are typically lower because of the decreased risk factor.

Unsecured debt, on the other hand, is riskier because the bank must have a high trust level that the borrower will pay back the funds as agreed. That’s why it’s only given to borrowers with high credit scores and strong debt-to-income ratios. Interest rates are typically higher than secured loan rates to reflect greater risk to the bank, and repayment terms may be less flexible. Speak with a financial expert to determine which type of debt is right for you.

Maximize Your Wealth with Good Debt

We believe in focusing on borrowing what one can afford and being mindful of reducing debt over time. It is essential not to fall into the credit card trap. And remember to make payments on time to maintain a good credit score.

If someone finds themselves in a position where they are not making payments on their debts or has an event that impacts their ability to make payments, communicating with creditors is crucial. Depending on the circumstance, you may be able to work out a payment plan to maintain and improve your financial health. Our financial experts are always willing to work with our borrowers who reach out to us, as it shows us the borrower is taking the initiative to address their debt obligations.

Smart Strategies for Managing Significant Amounts of Debt

At Traditions Bank, we believe that the ability to manage debt is all about balance. While good debt can be a powerful tool for building wealth, bad debt can be crippling. Working with a trusted financial advisor to understand your options and make informed decisions about your finances is essential.

At Traditions Bank, we pride ourselves on being trusted advisors who help our clients get to the next level or get them back to where they once were. We believe communication is key, and work closely with our borrowers to create personalized solutions that meet their unique needs. With our help, you can take control of your debts and build a brighter financial future.

Interested in getting started with a free, no-judgment financial wellness checkup? Discover your financial personality with our Financial Personality Indicator, and one of our advisors will reach out to discuss your results.