Debt can be a powerful tool or a dangerous trap. From mortgages and student loans to credit cards and car payments, most people use debt at some point to help reach financial goals. But not all debt is created equal, and not all borrowing makes sense for every situation. Understanding how different types of debt work, and how they fit into your financial picture, can help you borrow with clarity and confidence.

Understanding The Types Of Debt

Broadly speaking, debt falls into two categories:

• Unsecured Debt
  This type of debt isn’t tied to any specific asset. Credit cards, medical bills, and many student loans fall into this category. Because there’s no collateral, lenders take on more risk, and often charge higher interest rates. Miss a few payments, and you could face fees, credit damage, or even legal action.
• Secured Debt
  With secured debt, the lender has a claim on a specific asset like your home (in the case of a mortgage) or your car (in the case of an auto loan). These loans tend to offer lower rates because the lender can recoup their money by repossessing the asset if you default. But that means the stakes are higher: if you can’t make your payments, you risk losing something important.

Evaluating The Risk vs. Reward

The type of debt matters, but so does how you use it. Borrowing to purchase an appreciating or income-producing asset (like a home or a business investment) can support your long-term financial goals if done responsibly. On the other hand, financing lifestyle purchases or rapidly depreciating assets (like cars or vacations) can strain your finances and reduce future flexibility.

Convenience is another trap. Unsecured debt like credit cards can accumulate quickly, especially without a firm budget in place. Once debt becomes a habit instead of a tool, it can spiral beyond your control.

Are You Financially Ready To Take On Debt?

Just because a lender says “yes” doesn’t mean it’s a smart move. Lenders are focused on minimizing their risk, not necessarily optimizing your financial well-being. That’s why it’s so important to evaluate your own readiness before signing on the dotted line.

Ask yourself:

• Do I have adequate cash reserves?
  Aim to keep an emergency fund that covers 3–6 months of essential expenses. But don’t let too much cash sit idle. Keeping more than 120% of that target in low-earning accounts may hurt your long-term returns.

• Is my current debt under control?
  Ideally, your monthly debt payments (including mortgage, car loans, credit cards, etc.) should total less than 36% of your gross income. Consumer debt alone should stay below 10%. If that number creeps above 20%, it’s a red flag to avoid taking on more.

• Can I afford my housing costs?
  Try to keep total housing expenses including your mortgage or rent, taxes, insurance, and any association fees under 31% of your gross income. Lenders may offer higher limits, especially with FHA-backed loans, but those might not align with your personal comfort level.

A Thoughtful Approach To Borrowing

Debt can support your goals or sabotage them. It all comes down to how you use it. Take the time to review your income, expenses, emergency reserves, and existing obligations before committing to new debt. Staying disciplined and clear about what you can afford not only protects your finances, but also gives you peace of mind.

Need help reviewing your financial picture? We're happy to assist you in assessing your options and building a plan that keeps you moving forward. Contact us today.

Joames Artale is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.