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Types of Debt

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Updated: Oct 23, 2014

Highlights

  • Know the difference between Unsecured and Secured debts.
  • Revolving debts have different repayment methods than installment loans.
  • Know the credit impact and repayment challenges of each debt type.
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Learn About the Types of Debt and Differences Between Unsecured Debt and Secured Debt

There are a variety of types of debt. There are good debts and bad debts. It is important to understand debt and use borrowing strategically, so that you do not end up with a debt problem. If you have a debt problem, it is imperative that you take charge of the situation and solve your debt concerns the best way possible. This article discusses the two general types of debt to help you become an informed and educated borrower.

Types of Debt

There are two primary categories of debt: Secured Debt and Unsecured Debt. These then break-down in multiple sub-categories, including revolving, installment, and mortgage. In credit reporting, mortgage debt has the highest weighting on your credit score, then installment loans, and then revolving loans.

Secured Debt

Secured debt describes a debt that is secured by an asset that acts as collateral. With a secured debt, your lender has a security interest in the asset that you use as collateral. In business terms, this means an "asset-based-loan" and for consumers this typically means a home loan mortgage, an auto loan, a boat loan or any other type of loan secured by something. A good thing about secured loans is that they are less risky for the lender. They typically come with a lower interest rate, since the lender's risk-based pricing allows this to be a cheaper source of financing. An additional benefit of one specific secured debt, a mortgage loan, is that the interest is tax deductible which makes the effective interest rate even lower.

The concern with secured debts is that if you default, the consequences are severe, including repossession or foreclosure on the asset. Unlike credit cards, medical bills, or other unsecured debts, if you default on a mortgage you will face foreclosure. If you default on a car loan or an other asset based loan, you may face repossession.

Unsecured Debt

Unsecured debt describes a debt where you have an agreement to repay your lender, however, no asset is used as collateral to secure the loan. The most frequently used unsecured debt is credit card debt. Most credit card debt is a type of revolving debt, where your balance can go up or down and your main obligation is to repay the minimum monthly payment. Credit card debt can carry high interest rates, with national averages approaching 15% APR.

Student loans and some other forms of personal loans are also unsecured, however are known as installment loans. This means that the loan is repaid in straight-line periodic installments that do not vary and typically you cannot add to the balance, unlike credit card revolving debt. Medical bills also usually fall into this bucket.

A payday loan is an unsecured loan with extremely large interest rates. Payday loans require repayment immediately after the borrower receives his next paycheck. Loan amounts are usually small; they are based on the size of the borrower's paycheck. Because of the high interest and heavy penalties, once a borrower falls behind on a payday loan, it is difficult to catch up. This is a product that should be avoided, if at all possible.

Typically unsecured debts have the highest interest rates. Defaulting on an unsecured debt leads to penalties, fees, and potentially to collection efforts. The main problem with unsecured debt is the high cost, as it usually is riskier for the lender. The benefits are that it is easier to qualify for, is frequently convenient, and, in the event of default, there is no asset is at risk.

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  • LF
    Nov, 2013
    leanna
    My husband went in for a heart procedure and was unable to pay the bill. It is now in collections. He gets Social Security. We received a bill today and my name is on it. Will this affect my credit? Can they collect from me since he gets Social Security?
    0 Votes

    • BA
      Nov, 2013
      Bill
      You may have liability for the medical bills you described in two situations.
      1. You signed a guarantor contract when you signed the paperwork to check your spouse into the hospital.
      2. You live in a community property state.

      Consult with a lawyer who has consumer law experience to learn if you really do have legal liability for your spouse's medical debts. Do not just take the hospital's word for it that you do.

      0 Votes

  • KB
    Sep, 2013
    Keith
    Great comment flow.
    0 Votes

  • MN
    Nov, 2012
    M
    I was told by a credit company a truck I returned to them 4 years ago was charged off. Now I am getting calls from someone saying it wasn't and it is an E5 charge-off and I have 3 days to pay $1,000 or they will garnish my wages. Please help me understand. I just found a job again after being laid off.
    0 Votes

    • BA
      Nov, 2012
      Bill
      Charge off does not mean a debt is forgiven, cancelled, erased, or no longer owed. Click on the hyperlink I just mentioned to learn more about this oft-misunderstood accounting term.

      It is unlikely the caller will start garnishing your wages in the next three days. Follow the second link to learn more about your rights and potential liabilities.
      0 Votes

  • RJ
    Oct, 2012
    Ronnie
    I have several payday loans and can't seem to pay them off. Is there relief or help to get these paid off? Thank you
    0 Votes

    • BA
      Oct, 2012
      Bill
      Unfortunately, options are often limited when it comes to working out solutions on payday loans. Payday loan borrowers typically don't have strong credit that allows them to find more attractive borrowing options, or they would not take out payday loans in the first place.

      Read the Bills.com resource payday loans. Also, find out which government agency regulates payday loans in your state. Make sure that your loans are legal (some states, for instance prohibit online payday lending) and that the interest you're being charged is permitted.
      0 Votes

  • CH
    Apr, 2012
    CK
    I incurred a debt of approx 2k in 1980 via a student loan for a medical transcription course in Michigan. Started payments after graduation and moved out of State. Suffered an acute illness and relied on friends and family to live. Bill is now over 9K and has been transferred numerous times to different agencies. What are my options.
    0 Votes

    • BA
      Apr, 2012
      Bill
      If your loan was private, read the Bills.com article Private Student Loan Default. If your loan was federal, read the article Default on Federal Student Loan. Both discuss your options. Ask any follow-up questions on the appropriate page.
      0 Votes

    • BA
      Apr, 2012
      Bill
      Look into the statute of limitations for this debt. Though student loans can't be easily discharged in a bankruptcy, whether federal or private, private student loans are subject to SOL. If no one has sued you and obtained a judgment, it is likely that the SOL has expired. Discuss this with an attorney.
      0 Votes