Types of Debt

Bills.com Team
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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.
4.5
/5.0
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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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34 Comments

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  • 35x35
    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

    • 35x35
      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.
      1 Votes

  • 35x35
    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

    • 35x35
      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.
      1 Votes

  • 35x35
    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

    • 35x35
      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.
      1 Votes

    • 35x35
      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.
      1 Votes

  • 35x35
    Feb, 2012
    A
    I'm from MS. My daughter was rushed to the ER and admitted to the hospital for an overnight stay over 2 years ago. I have now been getting calls from a debt collector threatening to sue me. How long is the statute of limitations in MS for medical bills?
    0 Votes

  • 35x35
    Jan, 2012
    Debbie
    I had a procedure done at a hospital. The bill came to $283.05. I have been paying them $50.00 an month but they still sent it to a collection agency. Can they do that?
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      It seems odd that they would send a bill for such a small amount to a collection agency, if you are making consistent payments. Speak directly to the hospital billing department and negotiate a payment schedule with them. Before paying the collection agency, validate the debt.
      0 Votes

  • 35x35
    Jan, 2012
    Vanessa
    I have a loan that a payday company offered me. I also have a credit card and a pay day loan that I am behind on. I keep trying to stay on my feet and get these paid, but my economic situation just isn't helping at all. I am already late on all 3 and because they are on automatic payments trough my checking account they keep trying to take money from my bank account and i get charged these NSF fees or Over Draft Fees. what can I do? I barely have enough money left over to pay for groceries and my rent.
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      The debt cycle is one that is very difficult to break. As you get more in debt, you begin to pay more and more in interest charges and bank fees. First, set up a budget. Use the Bills.com budget guide to help you get started.

      Then, make a list of all of your debts. I recommend that you read about different debt relief options. It is possible that you can join a credit counseling or debt settlement program to solve your credit card problems. Payday loans are more difficult to deal with. Try to negotiate a payment plan appropriate to your situation. Knowing and controlling your cash flow will make it easier to negotiate a settlement.

      Speak to your bank. Paying for overdraft fees and NSF fees are expensive. Try to work out an arrangement with the bank to lower these fees.
      0 Votes

  • 35x35
    Jan, 2012
    Andrewho
    I have an EDD tax debt in California from 2003. Basically, EDD said I did not withhold enough taxes from employees so I owe my obligation as well as employees' I could not pay because, at the time, my business had already gone under. Will this debt ever expire? Will it negatively affect my credit score indefinitely? Any help would be much appreciated.
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      Basically, there is no statute of limitations for a debt to the EDD. I recommend that you read the Bills.com article about old debt with the CA EDD. Your credit score is mainly influenced by timely payments and credit utilization. An old debt, has less influence on your overall score. I suggest that you read the Bills.com article about bad credit.
      0 Votes

  • 35x35
    Nov, 2011
    T. L.
    Yesterday, I received a call for a cell phone bill that someone had put in my child's name back in 2001 or 2002. She was born in 1998 and could not have done it herself! I have no clue where this bill is coming from, however as her mother how liable am I, and will we have to pay it since years has passed? I can prove she is only 13, however I don't know who incurred the debt in her name. Please advise. Thank you!
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Your child's identity was stolen. See the Bills.com resource Identity Theft Recovery to learn what steps to take to respond to this crime. If you follow the proper steps, neither you nor your child will have liability for the debt.
      0 Votes

  • 35x35
    Sep, 2011
    jorene
    my brother passed away 1/13/11 and i am administrator over his account which only had truck of any value and a debt collector from 2008 is now trying to collect a debt of 5000.00 from the estate and they never tried to reach my brother for him to pay while he was still alive...what do i do? does not seem fair when they could have been collected on debit while my brother was alive...the company he had debit with home depot has already charged the acct off once they got copy of death certificate and then the collection agency sent in there req for payment right after i filed with clerk of court...my brother did not hide and only lived 4 hrs away and they my brothers ss# and i do collections with just using person ss# all day long...please help...thanks
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      I can't give you legal advice. Is there an attorney assisting with the probate of your brother's estate?
      My opinion is that the debt is still valid. Even though the creditor did not try to collect on the debt, I don't think that it forfeited its right to collect on the debt. You can check with an attorney to verify this.
      0 Votes

    • 35x35
      Nov, 2011
      Ryan
      sorry for your loss. I do know that creditors only have 90days to collect after death. They don't have a leg to stand on, and if they are bothering you, then you can sue them for that. There are rules they have to follow with calling times, when, how frequent. ect
      0 Votes

    • 35x35
      Nov, 2011
      Bill
      The 90-day rule you mentioned may be a state law local to one, or perhaps more states. However, the safest, most prudent advice anyone can offer is for the decedent's family to consult with a lawyer in the decedent's state to probate the estate.
      0 Votes

  • 35x35
    Sep, 2011
    Danielle
    I have a high interest rate car loan (17%, I believe) at a national corporation. I am wanting to refinance my car loan at a local credit union. I am not sure of my chances of getting a refinanced car loan, but I want to know is if I inquire at different banks will these all be reported on my credit report? Or if I make these inquiries within a week's time, will they count as one inquiry?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      The answer to your questions are "yes" and "yes." All the inquiries will show on your report, but they only will count against your credit score as one inquiry, if made within a 14-day period.
      0 Votes

  • 35x35
    May, 2011
    Amy
    I recently moved to Alabama and had a secured debt in Mississippi. I got behind on the note and contacted the finance company about renewing the loan only for the amount owed and they told me that could not do a loan for out of state residents. I was unable to get the note caught up and since the company has charged off this account. Can they still sue me in Alabama for a debt that was written in Mississippi?
    0 Votes

    • 35x35
      May, 2011
      Bill
      Yes. The creditor does not give up its right to collect on the debt, because you moved out of state. Charging off a debt is an accounting procedure where the creditor transfers a delinquent account from its accounts receivable books to its bad debt ledger. It does not affect the creditor's right to collect on the debt, through aggressive collection efforts or by suing you. The creditor can also come after the property you used to secure the loan.
      0 Votes

    • 35x35
      Sep, 2011
      MARY
      What if the property of which the loan was secured (equity) was sold at quick sale?
      0 Votes

  • 35x35
    May, 2011
    Paula
    3 years ago we lost our home to foreclosure. We had a second mortgage or equity line of credit on the property. The bank will not work with us to make a settlement. Instead they are going after our rent from the rental property we can't sell. We get just enough to pay our mortgages on the property not extra to pay this debt. We have made numerous efforts to settle with this creditor but to no avail. They want it all at one time - won't let us make payments. Do we have any recourse via the law to force them to let us make payments on the debt?
    0 Votes

    • 35x35
      May, 2011
      Bill
      A Chapter 13 bankruptcy will impose a payment plan on a creditor that is reluctant to negotiate.
      0 Votes

    • 35x35
      Aug, 2012
      shanell
      i have two charge offs on my credit from 2 repossesed vehicles i have been making $50 monthly payments on 1 and i know by doing that i will never get it paid. they say i owe $7,000 on each! What is a realistic lump sum payment i could offer them on each vehicle.
      0 Votes

    • 35x35
      Aug, 2012
      Bill
      There is no hard-and-fast rule about lump-sum settlements. This depends on the creditor and its policies, if the creditor has a cashflow problem and your offer comes at just the right time, and your financial situation. If you can show the creditor, "This is all I got, and not a penny more," and the creditor needs the money, then chances are the creditor will accept your offer.

      Start your negotiations at 15 cents on the dollar. Don't be surprised if your settlements conclude in the 40 to 60 cents range. Why 40-60? That seems to be the average for credit card settlements, but again, your mileage will vary.
      0 Votes

  • 35x35
    Feb, 2011
    Arlene
    What if after the 7 year waiting period when a debt supose to fall off your credit report, and a balance was still on it, what will happen to the balance that was on it, does it all just fall off also?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      This is a frequent question and source of confusion to many. A debt's disappearance from a credit report does not mean the collection account is canceled or the debt is forgiven. The seven-year rule refers to what the consumer credit reporting agencies can publish in a credit report. In some states, the statute of limitations has not run out on the debt, and the creditor still may use the state court system to pursue the debtor. The seven-year rule also has no relationship to the accounting term charge off.
      1 Votes

    • 35x35
      Oct, 2011
      Jean
      I lived in CA in a condo. I walked away and the bank holding my reverse mtg. said don't pay any more taxes or association fees. It sold after 18 mos. Now I am being taken to court for 18 months of those fees plus lawyer fees. I live on Social Security and a pension. My whole pension pays my rent. Can they take my pension from me? My SS pays my other expenses. and I keep that in a separate account.I don't have a bank acct. My pension is mailed to me and I cash it at a check cashing store and pay with a money order. I don't own a house or car so I have nothing for them to take for payment. They also said they would keep looking for my money for 20 years. I am 77. Is my pensions safe if it goes for my rent?
      0 Votes

    • 35x35
      Oct, 2011
      Bill
      Social security income can't be garnished by the type of creditor you owe; it is protected from garnishment.

      According to the Social Security Administration Web page Garnishing Social Security benefits due to a debt, "If a creditor other than the federal government tries to garnish your Social Security benefits, inform them that such an action violates Section 207 of the Social Security Act (42 U.S.C. 407). Section 207 bars garnishment of your benefits. It can also be used as a defense if your benefits are incorrectly garnished. Our responsibility for protecting benefits against garnishment, assignments and other legal processes usually ends when the beneficiary is paid. However, once paid, benefits continue to be protected under section 207 of Act as long as they are identifiable as Social Security benefits."

      Regarding your pension, most pensions are exempt from garnishment by your type of creditor. Consult with an attorney to find out if your pension is or is not exempt.

      Also speak with the attorney about protecting your bank account. It is my understanding that your Social Security funds have greater protections if they are directly deposited into your account. I believe that you can protect up to two months of your SS benefits, if they are direct deposited and not co-mingled with other funds, but please verify that with an attorney.

      If you can't afford an attorney, seek out a legal aid organization in your area that can provide you with no-cost legal advice.
      0 Votes