Debt

Types of Loans

Not all debt is created equal. A low-interest mortgage used to purchase an affordable home is very different from a high-interest personal loan used to finance unnecessary spending. Rather than treating all debt as inherently good or bad, consider the interest rate, purpose, repayment terms, and your ability to comfortably make the payments.

Student Loans

Student loans are one of the most common forms of debt, especially with higher education being a typical career path. Despite being so common, these often end up being one of the more complex areas for people to take on debt. Below are some of the key considerations:

• Interest rates vary widely based on the level of school you're attending

• Private loans don't come with the same protections or repayment options, and 

• Repayment options: Income-driven repayment, refinancing, and other programs can change the effective cost and risk of a loan.

• Forgiveness opportunities: Some borrowers may qualify for programs such as Public Service Loan Forgiveness.

• Investment opportunity cost: Paying down a low-interest loan provides a guaranteed return equal to the interest saved, but investing may offer greater expected long-term returns.

• Often more difficult to discharge through bankruptcy

A good strategy depends heavily on your individual situation. Paying off high-interest student loans can be one of the best uses of extra cash, while aggressively paying off very low-interest debt may be less compelling if you have other financial priorities.

Auto Loans

Cars are depreciating assets, which makes these loans particularly important to avoid. When you finance a vehicle, you're paying interest on something that isn't going up in value, like a home, or increasing income potential, like a degree.

The first step is trying to find a car you can pay for up front, and if that's not feasible, try to keep rates under 7% and avoid a vehicle payment that stretches you budget. However, be careful to not confuse low monthly payments with low overall cost, as long loan terms (>5 years) can result in paying substantially more for the vehicle.

Check out this page for more information on cars.

Mortgages

A mortgage will likely be the biggest loan you'll ever take on, but it helps you purchase an your home base, which appreciates over time and shields you from rent prices.

The most important consideration is what you can afford, not what you're approved for. Consider the full cost of homeownership, including interest, property taxes, insurance, maintenance, and other expenses, so you don't become "house poor."

Personal Loans and Other Debt

Personal loans, medical debt, buy-now-pay-later financing, and other forms of borrowing can vary considerably in cost and risk, and should be avoided at all costs.

Credit cards are a sneaky form of debt, as purchases can accrue interest if not paid in full. If you set your cards to auto pay the statement balance every month, you are fine. Credit cards are covered in more detail here.

Generally, the higher the interest rate, the stronger the case for paying the debt down quickly. Debt with double-digit interest rates can compound against you rapidly, making it difficult to build wealth while carrying a large balance.

When is Debt Worth It

Before taking on new debt, ask yourself each of the following questions.

What am I borrowing for?

Some things are genuinely worth borrowing money for, like a degree that will significantly improve your career prospects, or an affordable car that enables you to live a more convenient life.

What is the total cost of the loan?

Just because you can afford the payment does not mean it's a good deal. Loans often come with significant up-front costs, high interest, and heavy penalties if you miss a payment. After looking at the total cost, you'll likely realize you're paying a lot more than you realize. For example, a $40,000 car with a 10% APR, 5-year loan would end up costing over $50,000.

What interest rate am I paying?

This makes a much bigger difference than most people realize. That same $40,000 car with a 10% APR, 5-year loan would have a $850 monthly payment, and would go down to $755/month if the interest dropped to 5%. That doesn't seem like much, but that'd save over $5,000. Now if it matched the average credit card interest (around 25%), your payment would be $1,174/month, while the total could would be over $70,000.

How long will it take to repay?

Increasing the loan term can lead to a much lower payment, but a much higher overall cost. This leads to people stretching the term to as long as possible in order to make the monthly payment seem affordable. Using the same car example, going from a 5-year loan to 20 would lead the monthly payment dropping to just $386, but the total cost would be over $90,000.

Could I afford the purchase without borrowing?

Ideally, you shouldn't have to take out any loans. Of course, this isn't the reality for everyone, but at least make sure you're not taking on unnecessary debt.

Could you afford an alternative?

You may not need a new car or need to go to the fancy university. A three-year-old used car is just as reliable as a new one, and your career is not hindered by starting out as a community college.

What other financial goals will this payment prevent me from pursuing?

A loan is a commitment to set payments, even if the purchased good or service doesn't add value to your life. You might change your goals, like your major, or need to trade in your car because you're starting a family. Buying a home is a long-term goal for many, and taking out a loan for a new car could harm your credit and increase your mortgage rate.

Getting Out of Debt

If you have multiple loans, you need to find a plan that works for you. No matter what, you have to make the minimum payments, so the question lies in where you put your extra money. There are two main methods, with both having their own benefits. Don't worry about what other people say you should do or what's mathematically optimal, just do what feels right for you.

Avalanche Method

The avalanche method directs extra payments toward your highest-interest debt first while making minimum payments on everything else. This is the math-oriented one and minimizes the total interest you pay.

For example, if you have loans with interest rates of 10%, 20%, and 30%, you would focus on paying off the 20% interest one first. This feels intuitive for most, that loan is doing the most damage to your finances.

Snowball Method

The snowball method targets your smallest balance first, focusing on eliminating debts quickly to provide psychological motivation and make your finances feel less overwhelming.

Let's say you had those same loans of 10%, 20%, and 30% interest, and their amounts were $1,000, $30,000, and $15,000. This approach would suggest you pay off the 5% loan, even though it's not costing you as much as the others. This may feel wrong, but it also might just feel great to completely pay off a loan in a few months rather than multiple years.

Debt vs Investing

One of the trickiest financial decisions is determining when to pay down debt and when to invest. Paying off debt provides a guaranteed return equal to the interest rate you're avoiding, while investing offers uncertain, but potentially higher returns.

A great way to think about it is that the loans are the risk-free rate. As of 2026, savings accounts offer about 3%, so that's roughly the risk-free rate. In the long run, you'd rather take the average stock return of over 8%. If the risk-free rate was suddenly 15%, then it wouldn't make sense to take that chance. As a general rule of thumb, whether you should put extra money toward loans or investments depends on the loan APR.

• High (<6%): Prioritize paying off the loan(s).

• Moderate (4-6%): Depends on your risk tolerance. Consider splitting extra cash between debt repayment and investing.

• Low (<4%): Prioritizing investments is reasonable if you have a long time horizon and can tolerate market volatility.

Before making additional debt payments, make sure you are matching your employer 401(k) match and have an adequate emergency fund (1-2 months worth of expenses before high-interest debt, and 3-6 months worth of expenses before moderate and low-interest debt).

Bottom Line

The goal isn't necessarily to become debt-free as quickly as possible or avoid it at all costs; the goal is to avoid unnecessary debt and minimizing its cost and risk. Pay down high-interest debt, avoid borrowing for purchases you can't comfortably afford, and understand the impact on your other financial goals. Used carefully, debt can be a useful financial tool, but used carelessly, it can significantly hinder your well-being.