Levels of Debt (Explained)

What are payday loans?

• Quick loans with high interest rates
• Easy to get, but can lead to debt and worsen financial situation (Buy now, pay later schemes)

Who uses payday loans?

• around 12 million Americans per year
• People making under $40,000 a year
• Typically used by those already in a difficult financial situation

If you're considering a payday loan, think twice. It may seem like a quick fix, but it can lead to a never-ending cycle of debt!

Revolving debt involves credit cards, which can be a convenient way to pay for things but can also lead to debt if not managed properly. Here's how they work:

1. When you use a credit card, the bank pays for your purchase, and you have to pay them back at the end of the month.
2. If you don't pay the full amount, interest is added to your balance until you do.

This means that even small purchases can quickly add up and become difficult to pay off.

Remember: Keep track of your spending and always pay off your balance in full if possible.

If you thought level three was expensive, level four is even more demanding.

It's all about borrowing money for big purchases and long-term commitments like a car or an apartment. Although they call it "financing," it's just like using a credit card.

You get a loan to make the purchase, and you pay it off in regular installments + interest for 3 to 7 years. But beware, you're paying a lot more than the initial price, and the item you're buying will lose value over time.

In fact, it might even restrict your future choices, as you'll constantly have to make those hefty payments!

Student loans have gained the notion of "good debt" at this level. It's not about buying something but investing in your future. Education leads to a high-paying job. However, the reality differs.

• In 2025, over 44 million Americans owe student debt, which is over $1.7 trillion (more than Australia's GDP).
• At 18/19, students are convinced to take a six-digit loan for their career
• With a degree, comes income. But job opportunities often fall short.
• Even if you graduate, the average paying time is 20 years

A mortgage can seem like a smart move, but it's important to understand the risks and responsibilities that come with it.

Banks gave mortgages to people who couldn't afford them, causing the 2008 financial crisis.

• Mortgages make you a homeowner, but they also make you a long-term renter
• Missing payments can result in losing your home and financial stability
• It's essential to understand the risks and responsibilities of owning a home with a mortgage

Buying a house is the most significant purchase most people make, but it's not a risk-free investment.

• You'll be paying back hundreds of thousands of dollars over 20-30 years
• Mortgages are marketed as "good" debt, but they come with potential risks
• The market, job stability, interest rates, and maintenance all impact your investment

Remember: a mortgage is a long-term commitment impacts your financial future. So do your research, understand the risks, and make informed decisions to achieve your homeownership dream!

When it comes to business loans, you are no longer borrowing money but raising capital.

• This type of debt is a financial tool that can help your business grow and earn more than it costs.
• At this level, you will encounter lines of credit, equipment financing, bridge loans, and term sheets.

The key difference: Personal debt is based on your past, while business debt is based on your potential. 

Lenders are interested in your business's earning potential and scalability, not just your personal savings.

This means that if used correctly, business debt can become a powerful weapon to launch your business faster, hire a team, and cover expenses while your cash flow catches up.

• Remember, 20% of businesses fail in the first year, so there is still a risk factor involved.
• Be mindful of personal guarantees - if your business fails, the debt will follow you.
• If used wisely, business debt can be a ladder to success, but it can also break you if not managed properly.

Leveraged investments are when you use borrowed money to invest in other businesses, rather than your own.

For example:

• Your $1 million could be used in a stock portfolio for a 7 to 10% return.
• But if you borrow $3 million at 4% interest, you now have $4 million invested.
• If your investments return 10%, you make $400,000 instead of $100,000.
• The catch is that leverage magnifies gains and losses.

For instance, if your investments go down just 10%, you are now down $400,000 and still owe the bank their investment back.

At level nine, there's corporate debt. 99% of companies need cash flow to survive and turn brilliant ideas into reality.

• Debt helps fund employee salaries, materials, office construction, and R&D for companies that aren't yet profitable.
• Your everyday tools like phones, apps, and electric cars were also built with borrowed money.

It can work out well, like Netflix's successful content library expansion, but it can also lead to failure, as seen with the short-lived Q.B streaming platform which raised $2 billion before shutting down in under a year.

• Government debt is the debt that runs the world
• It is funded by spending more than what is collected in taxes
• Investors and other countries buy government bonds as a way to make up the gap
• Countries have tools to manage the debt, such as printing money and setting interest rates
• The US national debt has reached over $34 trillion, which equates to over $100,000 per citizen

• The impact of government debt is felt on a global scale, affecting budgets for social programs, infrastructure, and taxes.
• However, unlike personal or corporate debt, countries have mechanisms to manage and manipulate the debt, leading to potential long-term consequences.
• As a citizen, it's important to understand the role and power of government debt in shaping our economy and society.