Types of Debts
A debt is any time you owe someone money. If you ever bought an item and never paid in full, that is a debt. It implies that you will be at the mercy of your lender until you pay the money back. There are different types of debts that we will focus on. Note that some debts may fall into more than one category.
You will encounter different types of debts in your everyday life. However, the different kinds of debts are not created equally and some are considered better than others. Apart from government or corporate debts, personal debts can be classified into several types, for example secured, unsecured and revolving debts, mortgages and so on. Let us look closely at each of these categories of personal debts.
This is a debt that is backed up by an asset, also called a collateral. The lender usually looks at your borrowing history in order to determine the interest rate to charge you. They will also go ahead and place a claim of ownership, a lien, on your item. If for whatever reason you stopped paying the money you agreed upon, they have a right to take the item back through foreclosure or repossession.
Most lenders prefer the secured debt since it attracts less risks. It is however risky for you, since if you fail to pay the payments agreed upon, you may end up losing your item. If the item is one that depreciates in value like a car, you may end up losing more than it is worth.
For the unsecured loan, there is no asset held as collateral for the loan by the lender. It is therefore difficult for the lender to get back their money if you fail to pay up. This explains why they are charged such a high interest rate. If you do not take great care, this kind of debts can pile up very fast. Unsecured debts include signature loans, credit cards, medical bills and membership contracts.
In this kind of debt, an agreement is made between the consumer and the lender. This agreement allows the consumer to keep borrowing up to a certain maximum limit. Revolving debts include unsecured debts such as credit cards and store cards. In a credit card, there is a credit limit. You can spend any amount you want on the credit card as long as you do not exceed the limit. It also includes secured debts such as home equity.
This type of debt can only be used once. Once you borrow a certain amount of money, you pay it back in installments while adhering to a specific deadline. The amount of each monthly installment depends on the amount of debt you took. You also have to pay the interest every month for the remaining balance. After you have cleared the loan, you cannot get any more funds.
These are debts that are usually disguised as deals. Most people fall prey to this debts without even knowing. For example, you may see an advert saying 0% APR or 90 days which are same as the cash. The sales agents know that most people will not have paid for that item in 90 days, after which the interest rate will rise crazily. Another example is a mobile phone. People sign a contract to pay for a certain mobile phone for 1 or more years, but it is a secured loan. It can be taken any moment you fail to pay the amount agreed upon. Instead of this, you can just save to buy that latest iPhone you admire.
There is no such thing as good debt. There are some people who may think that for example, student loans are good. However, you will change this opinion when you talk to a person who is overwhelmed by a student loan he took 30 years ago while pursuing their degree. There are plenty of ways you can access quality education without taking a student loan. We can only say that some loans are better than others depending on the situation you are in. However, all loans are bad and should be avoided at all costs.