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Creating equity versus debt

Written By | Jul 17, 2014

WASHINGTON, July 17, 2014 − Some of the biggest investments that people make are in their cars and in their homes. People want to own these items instead of being owned by them.

It’s tough for someone to financially plan, though, if they are in debt. And it’s a painful fact that homes and cars can create equity, they can also create more debt.

“As an individual consumer’s debt increases, it’s logical that he or she would want to reduce the cost of these major payments,” said Steve Bowman, Chief Credit Risk Officer at GM Financial. “One way to achieve this goal is to seek a more affordable car payment by extending the length of the auto finance contract, but there’s a price to pay for that lower payment.”

That price is more interest and more money paid over the duration of that contract. This creates increased debt.

The average American has $15,191 in credit card debt. However, according to Nerd Wallet’s Tim Chen, that number is higher than it should be due to a small amount of individuals carrying very large amounts of debt. More troubling are the average American mortgage debt ($154,365) and the average student loan debt ($33,607.) Those numbers are current as of April 2014, according to Nerd Wallet.

There are a number of useful resources designed to help people get back in the black. Mint is probably the most recognizable free online financial tool. Intuit purchased Mint for $170 million in 2010, and the site now has more than 7 million users. Mint even sends alerts if you spend too much in a certain category.

There are also alternatives like Personal Capital and Manilla. Personal Capital has a great dashboard for tracking both spending and investing. Manilla is good for organizing finances.

For those further buried in debt, there are services like Smart Payment Plan, a bill payment service that matches payments to paydays, creating a cash flow that allows users to pay bills automatically every time they are paid.

“We usually see someone using our system produce $1,500 to $2,000 more in equity for their vehicle or home than if they did not use our system. A bank doesn’t want you to pay that debt off because that’s how they’re making money. But all Smart Payment Plan wants is to see you out of debt,” explained a Smart Payment Plan representative.

There are also ways to avoid negative equity when purchasing an automobile. Finance for fewer months, put 10 to 20 percent down, buy used, and don’t rush. In fact, 30 to 40% of a car’s value drops in the first two years on average, according to GM Financial. To find out if your car has equity, simply compare the amount you owe to the payoff amount, which can be found via Kelley Blue Book. The amount you owe minus the payoff amount will equal the amount of equity.

Getting out of debt or creating more equity can’t happen overnight. It takes a plan, the right tools, and commitment. The good news is that helpful plans and tools are available to help. All Americans have to do now is not fear that commitment.