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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?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Each state has its rate of delinquency and share of debts in collections. For example, in Alaska credit card delinquency rate was 2%, and the median credit card debt was $518.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.