Finance

What Are the Different Types of Debt? A Helpful Guide

If you are trying to learn about the different types of debt, you are in luck! Check out our guide here on the key things to know.

The consumer debt in the United States comes to $13.86 trillion.

This number may not surprise you depending on how much you’re in debt as a lone consumer. However, you should know that debt can be a good thing. The key is to have good debt and be able to pay it off on time.

In order to understand your debt, you have to know the types of debt. Lucky for you, we’ve lined up the four main categories of debt that you should know about.

 

Secured Debt

Secured debt is any debt that is tied to an asset. That asset would be collateral for the debt that you owe. If you don’t pay the debt back in a timely manner, that collateral will be repossessed.

An example of this would be a car loan. The loaner gives you the money so that you can buy the vehicle you want. However, they place a claim of ownership on the vehicle’s title.

This ensures that they would get the car back as collateral if you were not able to pay the loan back. These kinds of loans usually have an interest rate based on your credit score.

 

Unsecured Debt

As opposed to secured debt, unsecured debt does not involve any collateral. These loans are based on good faith. The loaner expects you to pay them back as agreed.

Lenders will usually draw a contractual agreement in this situation. This protects them from the possibility that you could not pay the loan on time. They can take the case to court and receive the money you own directly from you.

Examples of unsecured debt include medical bills and membership contracts.

 

Revolving Debt

Revolving debt is an agreement between the lender and the consumer that lets the consumer borrow a set amount of money on a recurring basis. An example of this is the widely-used credit card.

Credit cards have credit limits for each month. Every time you use one, you accumulate debt.

Revolving debt can be secured with an asset like a home equity line of credit or unsecured without an asset like credit cards are.

Most people in the United States have revolving debt. Those with too much overlapping debt may choose to consolidate their debt. You should learn more about debt consolidation and its relationship with your credit score if you too worry about your compounding debt.

 

Mortgages

Mortgages are the most common type of debt and are often the largest kind of debt that many consumers have as well. Mortgages are the types of loans that are used to pay for homes.

Mortgages are a secured form of debt with the home you’re buying serving as the collateral. These loans have some of the lowest interest rates.

They are most often given in 15-year or 30-year payment increments to make the payments affordable for customers.

 

Controlling Your Types of Debt

Compounding different types of debt can be scary, especially if you don’t believe that you have the ability to pay all of the money back on time.

There are many ways to control your debt now that you know the types of debt.

For more posts about finances, feel free to check out our blog.

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