Types of Debts
The term ‘debt’ is thrown around very casually and nowadays is used to describe many different things. In the terms of your finances, debt can come in a number of different forms. These are easily divided into four key categories of debt and it is important that you understand which they are. Knowing how to breakdown the specifics of your debt will help you to better understand what issues you are facing and how best to deal with them. Whenever you are consolidating or negotiating your debts, it is vital that you can comprehend them to the best of your ability. We will help you to breakdown the details of each and what they might mean for you, so you can best handle your concerns and actions.
The first type of debt is known as ‘secured debt’. A secured debt is any debt that is backed up by your personal assets, used as a means of collateral. This essentially reduces the risk that comes with giving any particular individual a loan and it generally means that you are able to ask for money that you would, without the offer of your asset. With a secured debt, if you are unable to make your repayments, then the collateral is seized by the creditor and sold off to try and pay off the outstanding amount.
In a contrary solution, unsecured debts are ones which do not have any associated collateral. This means that the entirety of unsecured debt is based off of a loan which is done in good faith, on the expectation that you will be able to pay off the outstanding amount with your agreed terms. However, that does not mean that if you default you will be able to avoid repayments, with law suits generally being a reality for those unable to keep up with repayments. Usually, an unsecured debt will mean a higher interest rate, to make the agreement more viable for the creditor and so this could come at a higher cost for you.
Revolving debts are easily described as the same method that credit card companies adopt for their process. It works with an agreed amount, which must not be exceeded and must be repaid on the agreed dates. In just about every instance, a commitment fee is paid to the creditor as a charge for their service and commitment to the agreement. Factors of revolving debts are usually based off of the debtor’s credit history and credit score, meaning that each deal will be unique to the person.
The largest source of debt amongst the American consumer, mortgages are easily the most common type of debt. Used to make property purchases, a mortgage is a loan given to fund the high costs of housing. In the way a secured debt uses collateral, a mortgage will use the property in question as collateral, meaning that if repayments aren’t met, the house will be sold off, to make back the owed amount. These are long-term finance agreements and so come with lower interest rates and even the option to remortgage and update the figure.