Debt can be difficult to navigate. Many of us experience it first hand, so it’s much easier to get debt than anything else! However, the idea of ​​”debt” is not a monolith. There are nuances to this as there are different types of debt. These types of liabilities can affect your finances in a variety of ways. (One thing is that not all types of debt are bad!) Knowing different types of debt and how to manage them can help you make better decisions about your finances.
This article discusses the different types of debt and highlights what you need to be careful about avoiding. I’ll also include examples that work to counter you.
Types of debt: Overview
Before diving into a specific example of debt, let’s discuss two major factors that allow you to divide your debt type into different categories.
Protected vs unsecured debt
At a high level, there are two major types of debts with collateral.
Secured debt
Secured debt is a type of loan that is protected by collateral, such as a home or car loan. If the borrower is unable to pay the loan, the lender can own collateral.
Unsecured debt
Unsecured debt is a type of loan do not have It is backed by collateral. Lenders usually have more interest or have more stringent loan requirements, as there is no way to guarantee repayment.
Unsecured debt includes credit cards, personal loans, student loans, and medical expenses.
Rotating and installment debt
Another distinction lies between revolving debt and installments. Both of these may fall under protected or unsecured umbrellas.
Revolving debt
By rotating your debt, you can borrow, repay, and re-guaranteed money to a certain limit. Credit cards are a very common form of revolving debt.
Interest rates for revolving debts vary depending on the type of loan and creditworthiness.
Debts in installments
An installment obligation is a type of loan in which the borrower makes a fixed payment over a period of time. Most of the examples on this list are installment loans. They are more common than rotating ones.
The main difference here is how the repayment is structured. When you spin the debt, you will use it to pay it back if necessary.
When you use installment liabilities, you will make a fixed payment over a specified period. Furthermore, revolving obligations typically have a higher interest rate than obligations.
Now that we’ve covered the basics, let’s break down the various unsecured subtypes in each category!
Five types of secured debt
To view debt as “protection,” you must have some form of collateral. In many cases, the items you are funding will act as collateral for itself. For example, stopping your car loan payments could result in your car being reclaimed.
If the borrower is the default, the lender can collect some of the losses, which generally makes it easier to approve a secured loan. Here are five examples of debts counted as protected!
1. Home loan
This is a type of secured debt used to fund the purchase of real estate, like a private home. The property itself is collateral for the loan.
If you stop paying, the lender will ultimately be able to seize the home. Mortgages are usually paid monthly over a period of 15-30 years.
When purchasing a house, you first place a certain amount (“down payment”). Next, apply for a mortgage to cover the rest.
Interest rates and principal
Your mortgage interest rate is based on your credit history, the amount of your loan, and the length of the loan term.
Like most loans, monthly payments are a mixture of principal and interest. Paying back the principal means less interest with each payment. This means that over time, more money will be applied to the principal.
Second, you own a larger percentage of your home called your home equity.
Good debt or bad debt? Mortgage debt is usually considered one of the best types of debt. However, it depends on the situation.
On the one hand, taking out a mortgage will allow you to buy a home, providing a place to build the foundation for a sound financial future (along with stability and (along with fairness). On the other hand, I would like to note that you are not chewing more than you can.
Large mortgages and other housing costs can lead to “poor home” if there is little room for other important costs, savings, or general financial flexibility.
2. Car loan
If you want to buy a car, like a car or a truck, there are two options. The first is to save money for the vehicle and pay the full amount in cash.
The second is taking away your car loan. These are installment loans with fixed payments over a specified period. The vehicle acts as collateral for its own loan, so it can be reclaimed in the event of non-payment.
What you need to get a car loan
To get a car loan, you usually need to provide your vehicle with proof of income, a credit score and a down payment. The terms of your loan will vary depending on your lender and your credit/finance.
Good debt or bad debt? This can be done either way. Instead of taking on a large debt for the latest and most expensive car, it is usually best to focus on more modest and affordable options.
Otherwise, you may have trouble making payments yourself and wonder how to get out of your car loan.
3. Equipment Loan
If you are a small business owner or entrepreneur, you may find yourself looking at different types of debt to fund the tools and machines you need to run your business. That’s the purpose of equipment loans.
Like the other two safe types above, the equipment you are purchasing will act as your own collateral.
You may use an equipment loan
Equipment loans are usually used to purchase items such as computers, software, machinery and other things that other businesses need to operate.
You can also use these types of debt to fund what you need for growth and expansion. Equipment loans are repaid in normal installments.
Good debt or bad debt? Overall, equipment loans are beneficial for businesses and entrepreneurs. However, make sure you calculate the numbers and consider them in your business plan.
This device should help small businesses achieve their goals and earn more money. But borrowing too quickly can put your business at risk.
4. Home Equity Loan
This type of loan, also known as the “second mortgage,” allows homeowners to borrow money by using the home’s capital as collateral.
Remember, do not forget that fairness is part of the value of a home belonging to the owner. As assets value increases, so can the stock value increase.
How to use your money from a home equity loan
People use home equity loans for a variety of reasons. You might want it for major life events like improvements, debt settlement, education costs, or weddings and medical expenses.
Homeowners can also use home equity loans to fund their purchase of a second home or investment property.
Homeowners can apply for a residential equity loan through a bank or lender. They determine the amount of stock available to the household and their ability to pay back the homeowner’s loans.
If approved, the homeowner will receive a lump sum payment and will generally have to make monthly payments on a loan with a fixed interest rate and repayment terms.
Good debt or bad debt? This depends on how you use it. If money is needed to bring about improvements to the value of your assets, it can become a useful liability.
The same applies to buying another property that will make money from you by leveraging the value of your home.
Alternatively, if you use the money on a loan to pay off a high-profit debt like a credit card, consolidating that debt at a lower interest rate could be a sensible financial decision.
But the flip side is that home equity loans are an example of very high interest liabilities. If you can’t make the payment, you could lose your home. So, proceed with caution!
5. Security credit line
If you don’t have a great credit score, you may have trouble getting a traditional, unsecured credit line (e.g. most credit cards). That’s where a safe credit line comes in.
You give collateral to secure your loan, like money in a savings account, vehicle, or other assets.
How does that affect your credit score?
The credit line rotates debt. This means you can access the funds as needed, pay off your debts and use them again in the future. The huge perk is that paying on time can help improve your credit score!
Good debt or bad debt? The main advantage of a secure credit line is that it helps you build your credits.
Of course, just like with secured loans, if you can’t make a payment, you risk losing your collateral (and tanking your credit even more).
Five types of unsecured debts
So let’s look at a variety of unsecured types of debt. The unsecured type does not include collateral, so if things go south, you don’t have to worry about losing your home or anything like that.
However, this type of debt is usually more expensive than secured debt because it is risky to lenders. Check out 5 different unsecured types of liabilities.
1. Credit Card
Perhaps this is one type of debt you’ve already heard of. If you choose to use your credit card to purchase a product or service, you are essentially borrowing money from the card issuer.
Pros and cons of credit cards
These interest rates are usually very high. If you don’t pay attention, your credit card debt will soon start to control compound interest and become out of control.
Of course, you can use your credit card wisely. If you pay the full amount each month, you will not pay a penny of interest or late fees.
Credit cards can also help you earn travel miles and cashback. Discipline and consistency allow you to make your credit card work instead of beating yourself.
Good debt or bad debt? Credit card debt is an example of bad debt. If you have credit card debts now, use these tips to pay off immediately.
Next, find out how to use your credit card in a responsible way for future purchases.
2. Student loan
Higher education usually comes with an intimidating price tag. If you want to start a new career with the help of a bachelor’s or graduate degree, you may need to take on student loan debt and make it happen.
This is one of the most common examples of youth debt.
Interest rates and repayments
Student loan debt allows students to borrow money to cover tuition and other university expenses. Fortunately, interest rates are usually lower for student loans than for other types of unsecured debt.
Repayment options vary, but usually students must begin paying off their loans once they leave school. In some cases, students may qualify for the Loan Waiver Program if they work for a qualified employer.
Good debt or bad debt? Student loan debt is generally considered to be a “good” debt. After all, it’s an investment in yourself and your future.
However, make sure you have a clear view of your future career and salary prospects and make sure you can make good profits from your investments. Find out these tips and resources on managing student loans, or this advice on how to avoid them.
3. Medical debt
For many, medical debt is an unfortunate surprise. When you suddenly face an accident, emergency, or a diagnosis that requires treatment, you may be uninsured or uninsured.
If you cannot afford to pay out-of-pocket expenses, you may have no choice but to assume medical debt.
Payment Options
Most hospitals help patients navigate payment options. You can usually apply for hospital funding through the hospital’s billing department or through a third-party funding company that the hospital is affiliated with.
Details about medical loans vary by hospital. They often have a low (or no) interest in making treatment more financially accessible.
Sometimes you can negotiate with the hospital for low bills.
Good debt or bad debt? Medical debt can be both good and bad debts. On the one hand, it is beneficial for those facing medical emergency or those who need to pay for treatment for chronic illnesses.
On the other hand, medical debt can also be a source of economic difficulties. Ultimately, it’s important to make sure you have health insurance at all times, but sometimes you can’t avoid this type of debt.
4. Payday loan
A payday loan is an ultra-short term loan that borrowers use to instantly access their money. They are based on the idea of ​​”making it until payday.”
Payback times and why people use payday loans
These loans are usually under $1,000 and can have a repayment period of just a few weeks. Unfortunately, they also tend to have very high profit margins.
People may resort to payday loans for a variety of reasons. They are often used by people who have no access to other types of loans or credit.
If someone is unable to cover unexpected expenses or pay the living expenses between payrolls, they may see payday loans as their best option.
Good debt or bad debt? Payday loans are one of the most dangerous types of debt, as they have a very high profit margin and a short repayment period. Borrowers often need to pay back the full amount on their loan within just a few weeks.
This can lead to a cycle of debt where borrowers are unable to pay off the loan in time and need to take another payday loan to cover their initial expenses when interest continues to increase.
If you find yourself desperately needing money, here are 34 ideas that are better than payday loans.
5. Signature loan
Finally, the list of debt types is a signature loan, also known as an unsecured personal loan. You will receive temporary cash that you can use for what you want.
Interest rates and what you need to qualify
Ideally, you would only pursue this type of loan for your needs or emergency costs. Like most types of unsecured obligations, lenders take more risk, so interest rates are generally higher (given the lack of collateral).
That being said, if you have a good credit score, a low debt-to-income ratio and a stable income, you may find it easier to qualify for a signing loan on favorable terms. If you don’t have a good credit history or a high debt-to-income ratio, it will be more difficult.
Good debt or bad debt? Signature loans are extremely expensive if not repaid immediately. It places most of them in the “bad type of debt” category.
However, if you can get decent terms and have no other options, a signing loan could be better than a credit card (and will definitely beat your payday loan).
Make a plan to tackle your debts
Given what you’ve learned above about different types of debt, it’s time to stock up your debts and divide them into your own good or bad categories.
Create a debt list
Start by creating a list of different types of debt, loan amounts, interest rates, and deadlines. Use this list to begin prioritizing debt payoffs.
Consider integrating what you owe
If you have multiple types of debt (particularly high profit obligations), we recommend that you consider reconciliation of your debt.
This is a way of combining multiple debts into one loan, making it easier to manage your debt and helping you get better interest rates.
However, it is important to remember that debt consolidation does not actually reduce the amount of debt you owe. It’s easier to manage.
Create a list, prioritize it, and once you’ve decided on a series of actions, try hard. Even if it takes a long time, you will eventually lose your debt.
Understand the types of debt and how they work
No matter what type of debt you have, it is essential to understand how it works and how it affects your long-term financial health.
If you manage responsibly, some types of debt can be positive, but bad debts can drag you in before you know it. As a general rule, the lower the debt, the better.
If you’re ready to take serious about managing your debt, there are plenty of tools you can use. You just need a debt repayment strategy and you’re on your way to a debt-free life!