4 types of debt you should avoid

To reach some of life’s big milestones like attending college, buying your dream home, or launching a business, sometimes you need a loan. That means you may well already have some sort of debt—or you may someday.  

Debt is often part of a solid financial plan. But some types of debt can do more harm than good. Certain kinds of debt are best to avoid, if possible. 

Let’s look at some of those types of debts. 

1. High-interest debt 

The higher the interest rate on a debt, the more interest you’ll pay over the same amount of time, compared to debt at a lower rate. If you're paying as much as you can but barely making a dent in the balance because so much of your monthly payment is going to interest, it’s time to rethink holding that type of debt. 

Credit cards: Credit cards tend to be a more expensive way to borrow compared to other options. You might be keeping up with your payments without making much headway against the debt because a big portion of your payment goes to interest.

Buy-now-pay-later: BNPL is often free if you can pay for your purchase within a very short time, such as two to four weeks. But if you can’t afford something now, what are the chances you can afford it in two weeks? Many people find they need more time to pay, and incur interest charges and fees.

Payday loans: The government calls these “predatory.” The lender is the predator and you are the prey. The terms are so expensive they are considered abusive to the borrower. Payday loan borrowers have to renew their loan an average of eight times, and pay interest and fees with each renewal, before they can finally get out from under their payday loan.

2. Debt for luxury items 

Taking on debt for nice things that are too expensive for your budget is a setup for regret. 

Debt is almost never free. You’ll pay interest for owing money. Borrowing to buy something expensive just makes it more costly. 

3. Debt that could put you in a debt trap 

If you’ve ever experienced a financial hardship that threw you into a panic, you’re not alone. Job loss or an unforeseen cost like a surprise medical expense can make many people wonder how they’re going to put one foot in front of the other financially. 

If you do find yourself in this position, you may be tempted to seek out a payday loan or title loan. But these loans typically have a short repayment term and can come with extremely high borrowing costs. 

The annual percentage rate (APR)—which measures the total cost of borrowing for a year—can be 391% or higher for payday loans and 300% or higher for title loans. For comparison, the average APR for credit cards with a balance was nearly 23% in early 2024. 

These short-term, expensive loans could result in a debt spiral that can be difficult to climb out of. 

4. Debt you can’t afford 

If you find yourself taking out debt without a plan to pay it off, or you’re insolvent—meaning the amount you owe is greater than the value of what you own—think again. Look carefully at your budget and put off borrowing if you are uneasy about whether you can pay it back. 

Take mortgages. If the monthly payment a mortgage lender says you can afford is a lot higher than what's comfortable for you, agreeing to that payment plan doesn’t make sense even if the lender says you qualify for it.

Each person’s financial situation is unique, and everyone has different standards for what is considered a healthy or unhealthy debt. There’s no one-size-fits-all answer. 

Ways to ditch the debt you’re done with

While everyone’s journey to knocking down their debt looks different, here are some options that could make sense: 

• If you have a high balance on your card, pay off that credit card debt with the debt snowball or avalanche methods.

• Budget and save for luxury items and purchase them once you can cover the cost rather than taking out a loan you’ll need to pay interest on. 

• Consider debt consolidation, which could reduce your monthly payments or your interest rate or both. You can get a personal loan and use that money to pay off your various debts. You could use a home equity loan for this strategy if you’re a homeowner with sufficient home equity. 

• Pursue debt resolution, which can help you get rid of your debts for less money than you owe. This is for people experiencing a significant financial hardship.