While financial experts disagree about the validity of so-called “good debt” like low-interest fixed-rate mortgage loans, there’s no dispute that toxic debt is all too real — and part of its toxicity lies in its penchant for lingering, sometimes for life.
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GOBankingRates spoke with a variety of financial professionals who deal with toxic debt for a living and have witnessed its disastrous impacts firsthand. Here are the debts they say to avoid at all costs — or risk having it haunt you forever.
Any Debt You Don’t Pay
The worst kind of debt is always the one on which you default.
“Any debt you don’t pay becomes dangerous, because defaults stay on your credit report for seven years,” said Gates Little, president and CEO of The Southern Bank Company. “Your credit score tanks, you get chased down by debt collectors and you struggle to secure new loans until the blemish is removed from your record.”
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Credit Card Debt
Revolving credit card debt is the bane of the American consumer, and thanks to monthly finance charges, even modest unpaid balances can claim years or decades of your life.
“Everyone gets a credit card with good intentions to keep the debt load at $0 every month, but we’re collectively failing with the $10,848 average credit card load per household,” said Little.
“And given the median average credit card interest rate is 24.37%, it quickly piles up for consumers struggling to make more than their minimum payments.”
Little gave an example of how revolving debt can consume your financial life and follow you for years.
“Say you owe $10,848 at 24.37% interest,” he said. “Even if you stop using your credit card today and pay $250 each month, it will take you almost nine years to pay down your balance, and you’ll pay $15,644.03 in interest alone, for a total of $26,492.03 — more than double what you initially spent.
“And since so many people are leaning on credit to float their living expenses, it gives them a false sense of reality that they’re living within their means, when there are major underlying issues between income and expenditures to address. When the bubble bursts for these people, it often spells financial disaster.”
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Payday Loans and Other Predatory Lending Debt
Some lenders extend credit and loans as a service in exchange for interest payments as compensation. Others dangle fast, easy cash in front of the most vulnerable borrowers to ensnare them in a financial trap they can’t escape.
“One type of debt that stands out as especially harmful is predatory lending debt,” said Jenna Trigg, who co-founded Silver Fox Secure with her father to help eliminate the financial exploitation of seniors, active military and mentally and physically disadvantaged individuals.
“These are debts accrued through loans with exorbitant interest rates and unfavorable terms, often targeting seniors, military personnel and those with limited financial literacy,” she explained. “The danger of predatory lending is not just in the high costs but in how they can trap individuals in a cycle of debt that is almost impossible to escape, leading to a cascade of financial woes, including potential bankruptcy, damaged credit scores and the loss of financial independence.
She called out payday loans, specifically.
“Designed as a short-term solution to a financial shortfall, these loans often carry exorbitant interest rates that can lead to long-term debt cycles,” said Trigg. “The danger lies in their accessibility and how quickly they can spiral out of control, leaving individuals in a worse financial situation than they were initially.”
Unstructured Business Debt
Unstructured business debt, including lines of credit or loans without clear terms and repayment plans, can also pose significant risks and lingering damage.
“Such debts can lead to unpredictable financial obligations, impacting a business’s ability to plan for the future and potentially stunting growth,” said Philip Wentworth, Jr., entrepreneur and co-founder of Rockerbox Tax Solutions, which provides small business owners with financial management solutions. “We work with clients to restructure these debts, negotiating better terms and instituting manageable repayment plans that align with their business cash flows and financial planning strategies.”
Student Loans
Few debts linger longer than those that students take on to pay for college. According to the Education Data Initiative, the average student borrower takes 20 years to pay off their loan, with some professional graduates taking 45 years.
“Exercise caution with student loans surpassing future earning potential, as excessive education debt can impede financial progress for decades,” said Joel Lee, certified public accountant, tax advisor and owner of Thorough Financial Services.
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Direct Deposit Advances
Many financial institutions advertise early access to your paycheck as if it’s a friendly service to thank you for being a customer. It is not.
“The lender issues a loan slightly smaller than the upcoming expected direct deposit,” said attorney Luke Smith, founder of LawSmith PLLC. “The lender then automatically withdraws the principal plus interest or a fee when the direct deposit hits. The borrower’s paycheck is gone on arrival, leaving the borrower with little choice but another direct deposit advance. Borrowers that repeat this for a year may end up paying several times the loan amount in interest.”
Pre-Settlement Funding
If you’re embroiled in a civil lawsuit and expecting a windfall, specialty financial firms will line up to give you early access to the settlement funds you anticipate collecting. Like direct deposit advances, they’re not doing it out of kindness or a sense of customer service.
“The lender issues a loan in exchange for a lien on the proceeds from a lawsuit,” said Smith. “The fees and interest often exceed the loan amount by the time the case is settled.”
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This article originally appeared on GOBankingRates.com: 7 Worst Debts To Avoid That Will Follow You Forever