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What Are The Different Types Of Debt?

People generally have different types of debt and can be difficult of understand the complexities of the different types. In order to make an accurate assessment of your debt and deal with it effectively, you need to look at more than just the amount of debt you have. It is important to understand the different types of debt that exist and then categorize them according to your financial situation. The main types of debt are explained in simple terms...

Secured Debt

Secured debt is a term used to describe a debt, such as a mortgage loan, that is backed by a legal claim against a borrower's asset such as a property. You could risk losing your home if the debt is not repaid. The lender has the right to sell the property to recover the money owed.

Unsecured Debt

An unsecured debt is a debt that is not backed by any collateral. These can be typically, credit card debts, medical bills and payday loans and can also be eliminated in a bankruptcy.

Instalment Debt

Instalment debts are debts that are fixed in repayment amount. The interest charge is fixed up front before you start to pay the loan. An example of this type of debt is a fixed car repayment loan. This type of debt is useful for budgeting as you know exactly what is due every month, until the debt is paid off in full.

Revolving Debt

A revolving debt does not have a fixed repayment and the balance owing may change from month to month. Repayment is usually a percentage of the outstanding balance and often paid monthly. The most common revolving debts are credit cards issued by banks and department stores. Revolving debt is riskier than instalment debt as you can change the amount borrowed through continued spending.

Bad Debt

Personal debt is often referred to as “bad debt”. This results from a purchase of an asset that will be likely to depreciate in value over time, such as a car. This kind of debt should be avoided where possible as you are not only giving the lender interest on your borrowing but the commodity you have bought will not be worth as much as you paid for it shortly after you have bought it – and will continue to lose value in time. The worse kind of bad debt is that which offers short term pleasure such as a holiday or eating out.

Good Debt

Good debt can be categorized as investment debt and is best described as a purchase of an asset which is likely to appreciate in value over time. The best example of this is buying a home, as in time, a house will generally increase in value overall. Also the tax deduction alone on mortgage interest makes investment debt one of the more acceptable types of debt. Other examples of investment debt are education or starting a new business.