Types of Debt
Different types of consumer debts function in different ways. Understanding the differences between your debts allows you to be more strategic in how you manage your money and pay your debts off. With a better grasp of how different kinds of consumer debts work, you can make more educated decisions about taking on new debts and maintaining control over the debts you have.
If you have any questions about debt or need advice on how to manage your debts to your best financial advantage, call us at 1-800-990-9838. A certified credit counselor can provide a free debt consultation to give you the answers you need to help you build a brighter financial future. With the right information, you can be the one in control of your debts, instead of letting your debts control you.
Difference between secured debts and unsecured debts
The first key difference between various kinds of consumer debts is whether the debt is secured or unsecured. A secured debt is a debt that offers some kind of collateral that your lender can take if you don’t pay your debt. This type of debt includes your mortgage and car loans, since your house or car can get taken away if you don’t keep up with your payments. That’s why it’s vital to pay these bills on time to avoid the potential of losing your home or car.
An unsecured debt is any type of consumer debt that doesn’t offer collateral. If you don’t pay on these debts, they can go into collections and/or your lender can sue you for what you owe. Things like credit cards, payday cash advances or payday loans, and some kinds of personal loans are unsecured debts.
Differences between installment debts and revolving debts
The next main difference between different types of consumer debts involves how you pay the debt back. An installment debt—also called a fixed debt—is a debt where the amount you pay on your bill is the same each month. No matter how much you owe, the payment due each month is always the same. Payments for your mortgage, car loan, and some personal loans are typically installment debts with fixed payments each month.
By contrast, revolving debts are debts where your monthly payments aren’t fixed. Your monthly payments are usually calculated as a percentage of your total debt or using a formula that combines the interest plus a percentage of your total balance. Credit card debts are typically revolving debts. Since revolving debts have variable payments it means the lower your balance is, the less you have to pay each month.
Why is the type of debt important?
Knowing what kinds of debts you hold can help you protect your investments and secure a better financial future by managing your debt in the most strategic way possible. While secured debts with fixed payments like your mortgage or car payment should always be paid on time to protect the collateral, you usually don’t get any significant benefit by paying more than the amount due on your bill. On the other hand, paying more than the minimum amount due on an unsecured revolving debt like a credit card allows you to reduce the amount you owe each month to free up more money in your monthly budget.