Avoiding the Debt Trap: Renting to Own, Student Loans, and Depreciating Assets

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Photo courtesy of TJDee

As we noted last week, it’s a rare person who is able to pay for everything they want and need with straight up CASH. Oftentimes, even people with eye-popping incomes find it difficult to live within their means, perpetuating the saying: “the more you have, the more you want.” Which underlines our point. Almost everyone is indebted to someone.

With that being said, not all debt is created equal. “Good” debt is defined by several factors, not the least of which is a low interest rate. Generally, if you’re making an investment in something that’s value will increase over time, you’re investing wisely. Also important: being able to comfortably afford the monthly payments.

As a continuation of last week’s post, we’re going to turn our attention back to the dark side of debt in order to help you avoid making costly mistakes that will drain your bank account quickly. “Bad” debt almost always comes with a high interest rate, and typically is incurred when purchasing things that lose their value quickly. Also: any debt is automatically a bad idea if you can’t even make the monthly payments.

Renting to Own – Let’s say you really want to own a home, but can’t afford it or won’t be approved for a mortgage due to a low credit score. By renting to own, you enter into an agreement with a seller wherein you pay a monthly rent that’s higher than market value. The extra money you pay per month supposedly goes toward a down payment. Sounds great, right?

Well, it could be great. But it could also take a turn and go terribly wrong. After your lease is up, what happens if you still can’t afford to buy the home, or a lender still won’t give you a loan? The seller gets to keep all the extra rent money you’d been paying.

Also, because the homeowner will realize you’re in a tough spot with few options, chances are good that they’ll price their home way above what it’s really worth. Because you’ll be renting to own first, you may not know the true value of the home (i.e. having it appraised) before it’s too late and you’ll suddenly find that no bank will finance a home that’s priced out of the market.

Consider this: what happens if the homeowner takes your rent payment each month but doesn’t follow through and make the mortgage payment? That’s right: the home will go into foreclosure. That leaves you out on the street and out all of your money, with no rights whatsoever regarding ownership of the home.

Excessive Student Loans – Don’t misinterpret this to mean that you shouldn’t borrow any money in order to get an education. Most of us couldn’t afford to write a check or hand over wads of cash and then head off to a four year college. This type of financial obligation slides from the “good” to “bad” debt column when people give themselves carte blanche.

The general line of thinking is that all student loans are fine and dandy because, after all, you’re bettering yourself! You’re getting a degree, which will then open all sorts of doors for your career, increasing your income by leaps and bounds!

That attitude is extremely dangerous, as it gives individuals (and families) the rationalization they need to ring up astronomical amounts of student loan debt. Here at Veitengruber Law, we’ve seen this scenario too many times to count, which is why we tell clients to be prudent when it comes to taking out student loans.

The New York Times has reported that the amount of student loan debt is now higher than credit card debt in the U.S. A college education is very expensive, with the average per year price at a public school coming in at nearly $9,000, and that’s not including room and board, which adds an additional $9,500. Attending a public school for four years costs around $36,000, if you can live at home with mom and pop. Want to experience dorm life? You can, for a mind-numbing price of just $74,000 (for four years).

To put it into more relatable terms: many of us will still be paying off student loans when our own children are going off to college. Dealing with huge amounts of student loan debt has been dubbed the “anti-dowry” in some circles, leaving young people staying single longer, waiting until they’re financially stable to start a family.

The worst thing about student loan debt is their permanence. No one wants to declare bankruptcy, but for those who do, their debt is virtually erased, giving them the chance at a do-over. One of the only debts that cannot be wiped out via bankruptcy? Student loans. Once you’ve got that education, you can’t give it back, either. You might be able to sell the high priced car you can’t afford, or short sell your home, but you’re pretty much stuck with that high-priced education, any which way you look at it.

Financing an expensive asset that you can’t afford – Once you’ve gotten the degree, hopefully by attending a local college and living with your parents, you will, with any luck, be out in the work force. In order to make it to your job every day, you’ll need transportation. The most affordable (and also environmentally friendly) option is public transportation.

Assuming you don’t have access to a reliable form of public transport, you’ll need to buy a car. A mistake made by many young graduates is to “celebrate” their new state of employment by financing a grandiose, brand new, fully loaded vehicle, whose value begins to depreciate sharply the second it’s driven off the lot. This means you’ll be making high monthly car payments on a car that’s becoming less and less valuable the older it gets.

Our best advice on this topic is to avoid as much “bad” debt as possible, or keep it at a manageable level. If you’ve already found yourself caught in a debt trap and need help setting yourself free, we can help. We’ll even consult with you at no cost, to review your “bad” debt and let you know what we can do. You’ll find our contact page here. Also, please take a moment to visit us on Facebook, our website, or follow us on Twitter for helpful daily tips to keep your financial future looking bright.

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One Response to Avoiding the Debt Trap: Renting to Own, Student Loans, and Depreciating Assets

  1. Pingback: Avoiding Debt Traps: Pay Day Loans, Rapid Refunds & Co-Signing | Veitengruber Law

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