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Debt is an obligation to repay money you borrow. However, the way your repayment is structured like varies depending on the kind of debt you have. Different types of debt can be governed by distinctive sets of laws. Here is a summary of the most common types of debt you may encounter.
Installment loans are repaid with equal, regular (usually monthly) installments. Their interest rates are fixed. Often, installment loans are used to purchase assets like cars or boats. In that case, the loan is secured by the asset, which can be repossessed if you don’t make the payments as agreed. Personal loans, also called “signature loans,” are unsecured installment loans.
Tax debt is owed to your federal, state or local government. The government is a tough creditor. It’s nearly impossible to discharge tax debt in a bankruptcy, and unless you contact the tax authorities and make arrangements for repayment, your future wages, bank balances, car and even your home could be taken from you to settle your account.
Medical debt is usually involuntary and unplanned-for. Never ignore medical bills, even if you cannot pay them – it’s generally easier to negotiate repayment terms with a hospital than a collection agency. Medical bills tend to go to collection faster than other types of debt – sometimes before you have even received a billing statement! Understand that it may not matter that you’re making a small payment each month, or are disputing the amount owed – your account might still be turned over to a collection agency. Fortunately, medical collections do not affect your FICO at all once they’ve been paid.
Student debt is considered “good” debt by many financial advisors. That’s because education should increase your financial well-being in the long run. It’s a type of installment loan but is governed by a special set of rules. Student loans come in two forms – private and government-backed. The standard repayment period for a government-backed student loan is ten years. However, student loans can be refinanced or restructured in many ways to make repayment more affordable.
A mortgage is any debt secured by residential real estate. Because they are backed by real property that can be foreclosed and sold, mortgages are considered low-risk financing by lenders. This reduced risk to lenders allows them to charge less for home loans than for loans secured by personal property, like automobiles, or for unsecured loans like credit card accounts. Mortgages can have terms ranging from less than five years to more than 30, but most come with 15 or 30-year terms. Mortgage rates can be fixed, adjustable or a combination of both.
Credit cards and lines of credit are called “revolving” debt. Account holders can make purchases or withdraw money from their credit lines, up to their limits, any time they want. They are usually required to make a minimum monthly payment, which is typically some percentage of the account balance. Credit cards can have fixed or variable interest rates.
Struggling with debt?
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q3 2023 was $17.291 trillion. Housing debt totaled $12.489 trillion and non-housing debt was $4.802 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Wyoming, 24% have any kind of debt in collections and the median debt in collections is $2680. Medical debt is common and 17% have that in collections. The median medical debt in collections is $1515.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.