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Debt Loans: Choose the Right One for Your Situation

Debt Loans: Choose the Right One for Your Situation

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Betsalel Cohen
UpdatedJun 19, 2024
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    4 min read
Key Takeaways:
  • Debt loans come in different shapes and sizes.
  • Learn about the type of borrower you are.
  • Match the debt loan to your financial situation.

Debt Loans: Finding One For Your Situation

There are debt loans available in all shapes and sizes. It is very confusing when shopping around for a loan or looking for debt relief solutions. The term debt loan, for instance, is used in different ways.

"Debt loan" is used to describe the following products:

  • A home equity loan or a cash-out refinance
  • A personal loan
  • A Debt Management Program, which is really a payment consolidation and not a loan

In order to help you find the right debt loan for your particular financial situation, this article will discuss:

  1. The types and characteristics of Debt Loans
  2. Borrower profiles and financial needs
  3. Choosing the right debt loan and debt relief solution to meet your financial needs

The Types and Characteristics of Debt Loans

Secured vs. Unsecured Loans

Lenders require different types of security for different types of debt loans. Loans can be classified as secured loans or unsecured loans. If you provide an asset as collateral, such as a house or auto, then the loan is a secured loan. If the lender relies solely on your personal guarantee, then the loan is an unsecured loan. In general, unsecured loans are more expensive, as they carry a greater risk to the lender.

Here are some examples of debt loans that fall into these categories:

  • Unsecured loans: payday loan, personal loan, student consolidation loan, credit cards, medical debt
  • Secured loans: title loan, auto loan, cash-out refinance, home equity

For a more detailed discussion of personal loans secured vs. unsecured loans, see the article about personal debts and personal loans.

Quick tip #1:

Student loans, both federal and private are handled separately. For more information about student loan consolidation read the article consolidating student loans.

3 Common Reasons to Take a Debt Loan

There are debt loans for every financial situation. Debt loans can be used to solve urgent, pressing financial needs (such as paying a bill before the end of the month). Sometimes they are used to finance long-term projects. Some common uses are to:

  • Pay off pressing bills
  • Pay off credit card and medical bills
  • Purchase big ticket items or vacations

If you are in financial distress, then you may feel pressured to take out high-interest loans that come with expensive fees. Be careful, because if you don't have the funds to make the required payments, then you will immediately be subject to aggressive collection tactics.

Borrower Profile

We all have different financial backgrounds, situations, and needs, which change over time. It is important to keep in mind long-term goals that include saving money and building equity. The terms of the debt loan that you can qualify for depend on your creditworthiness and overall financial position.

Borrowers looking for debt loans have different financial profiles. Here are a few ways of looking at the your financial status:

  • Do I have a good credit score or a bad credit score?
  • Do I have a high net-worth or a negative net-worth? Do I have lots of assets or lots of debt?
  • Do I have a good income? How does my income match up with my monthly expenses? Is my cash flow positive or negative?
  • Do I have late payments or am I in default on my loans or credit? Am I facing collection calls, law suits, or court judgments

Choosing a Debt Loan & Debt Relief Solution to Meet your Financial Needs

Here are some tips to help your find the right debt loan for your financial situation:

  1. Identify your situation: If you are not a well-qualified borrower, then work on building your credit score, your debt to income ratio, and your equity position.
  2. Work on a budget to guide yourself.
  3. Take out healthy debt that will help you build your equity.
  4. Avoid short-term, stop-gap loans, like pay-day or "fast" loans.
  5. When you take out personal loans and credit cards, shop around for the best deal.

The stronger the borrower you are, the more options will be available (as you can also use options open to borrowers weaker than yourself), and the cheaper the options will be. To help you match your financial situation with the debt loan appropriate for you, review the following chart:

Weak BorrowerStrong Borrower
Borrower Characteristics• Bad Credit • Negative Cash Flow • No assets and/or lots of debt • Facing law suits and/or court judgments• Excellent Credit • Lots of Equity (house, investments, retirement accounts, auto) • Positive monthly cash flow • No credit problems
Types of Debt Loans• High interest personal loans • High interest and fee Payday loans • Title loans• Home Equity loan • Cash-out refinance • Credit Cards • Personal loans • Credit Card payment tactics, like snowball and avalanche • 401(k) loan
Non Debt Loan Solutions• Debt Settlement • Debt Management • Bankruptcy

Debt Loan Options by Borrower Types

Once you choose the solution (or solutions) that seem most appropriate to your financial situation, use the resources to receive more in-depth details about the various debt loan and debt relief products.

Quick tip:

Use Debt Coach to help you find the best debt relief strategy.

Dealing 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 Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 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 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.

The amount of debt and debt in collections vary by state. For example, in Maine, 24% have any kind of debt in collections and the median debt in collections is $1598. Medical debt is common and 15% have that in collections. The median medical debt in collections is $825.

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.