What Are the Types of Debt?

Most of us encounter some form of debt in our lives. However, not all debts equally the same, and some are considered better than others. Indeed, while debt comes in several forms, all personal debt can be categorized into a few main types: secured debt, unsecured debt, revolving debt, and mortgages.

Secured Debt

Secured debt is any debt backed by an asset, a physical item, for collateral purposes. A credit check is necessary for the lender to judge how responsibly you have handled debt in the past, but an "asset" is guaranteed to the lender if you, the borrower, do not repay the loan. If you do not pay back the loan isn't paid, the lender can seize the asset.

A car loan is an example of secured debt. A lender supplies you with the cash necessary to purchase it but also places a lien or claim of ownership on the vehicle's title. If you, the car buyer fails, to make payments, the lender can repossess the car and sell it to recoup the funds. Secured loans like this have a fairly reasonable interest rate based on creditworthiness and collateral value.

Unsecured Debt

Unsecured debt lacks any collateral. When a lender issues a loan with no asset held as collateral, it only depends on the faith in the borrower's ability and promise to repay the loan. A contractual agreement binds the borrower to repay the funds, and if there is a default, the lender can go to court to reclaim any money owed. However, doing so comes at a high cost to the lender, and, for this reason, unsecured debt generally comes with a higher interest rate. Some examples of unsecured debt include credit cards, signature loans, student loans, membership/subscription contracts, and medical bills.

Revolving Debt

Revolving debt is an agreement between a lender and consumer that regularly enables the consumer to borrow an amount up to a maximum limit. A line of credit or a credit card are examples of revolving debt. A credit card has a credit limit, and the consumer is free to spend any amount below the limit. The payment amount for revolving is based on the current amount of money on the loan. Revolving debt can be unsecured, such as a credit card, or secured, such as on a home equity line of credit.

Mortgages

Mortgages are the most common and most significant debt many people carry. Mortgages are loans made to purchase homes, with the subject real estate serving as collateral. A mortgage typically has the lowest interest rate of any consumer loan, and the interest is often tax-deductible for those who itemize their taxes. Mortgage loans are commonly issued at 15- or 30-year terms to keep monthly payments affordable for homeowners.

Watch Out for Sneaky Debt! 😡

You can almost finance anything. You’ve probably heard of “Zero percent APR! Or 90 days same as cash!” These are prime examples of sneaky debt. Most people don’t pay off those purchases within 90 days. Ridiculous interest rates kick in the day after that 90 window expires. Examples of these are credit card points, airline miles, and even cell phone contracts. Even credit card points and airline miles are another way to tempt people to spend more money in the hopes of getting a little reward. Cell phones fall into the sneaky debt category because many of us don’t think twice before signing a contract and agreeing to pay off our phone every month for the next two years