Debt is money borrowed by one party called the debtor he gets money and has to pay money or other agreed-upon value to another party, the creditor or lender who lends the money. Debt is to be paid in installments with interest. Debt can be of any type as people can’t afford to purchase their desired thing immediately or build a house so it is useful for them to take out a loan to full fill their need.
Sometimes People consider debt to survive just for basic needs of food and shelter for their family. Debt can cause expenses to exceed income. But still, people got into debt. If someone wants to avoid bankruptcy then he should pay his all due monthly installments on time so he can become debt-free on time. He has to make a proper budget and make a proper check of his income and expenses.
Debt is not an easy thing but people take it as in need some other factors like some people get onto loans for just their lavish life and take it very easy these type of people often become bankrupt. There are the following types of debt people often take.
1. Personal debt
Personal debt is debt for which only you are personally legally responsible. Personal debt may include more than one party, for example, you and your spouse take out a loan together. It is non-business debt. Personal debt has many types it can be secured debt, unsecured debt, revolving debt, and mortgages.
2. Secured debt
Secured debt is backed by an asset for collateral purposes. It means that for debt security the debt borrower has to secure his loan by some of his property. That property will be collateral until all debt is paid. First, a credit check is done for the lender to judge how the borrower handled debt in the past. So in this type of debt, the asset or property is pledged to the lender in case the borrower does not repay the loan and the lender can seize the asset.
3. Unsecured debt
Unsecured debt is only based on an individual’s creditworthiness and it doesn’t have any collateral. So it means that when a lender makes a loan with no collateral, he has the faith in the borrower’s promise to repay the loan. The borrower has to sign an agreement to repay the funds, and if there is a default, the lender can visit the court to reclaim that debt money. As this is unsecured debt so it generally comes with a higher interest rate. Some examples are credit cards, gym membership contracts, and medical bills, etc.
4. Revolving Debt
Revolving debt helps the consumer to borrow a debt up to a maximum limit regularly. This is an agreement made between a lender and a consumer. Revolving debt can be unsecured, or secured. A credit card is an unsecured revolving debt and a home equity line of credit is a secured revolving debt.
As s credit card has a credit limit, so the consumer is free to spend the desired amount below the limit until the limit is gained. Payments for this type of debt vary and are based on the number of funds currently on loan.
Mortgages are the largest and most common debt that many consumers carry. Mortgages loans are made to purchase homes/ Mortgages are collateral loans as with the subject real estate is collateral. This one usually has the lowest interest rate and is often tax-deductible for those consumers who itemize their taxes. Mortgage loans are most usually issued at 15- or 30-year terms to keep monthly affordable payments for homeowners.
6. Student loans
Student loans are offered by the Student Loans Company, student loans offer government-backed cash to students to complete their first degree or postgraduate qualification. Students apply for this loan before the start of their studies and receive the money in installments. Student loans can include tuition loans to cover fees and maintenance loans to cover living expenses; this depends and varies according to the fees and household income of the applying student. This is very good for needy students to complete their degree as they don’t have to repay the loan until they graduate and their salary reaches a certain threshold. The repayments of student loans are fixed at a percentage of earnings above that amount.
7. Car finance
The majority of cars are borrowed usually using personal contract plans (PCP). These PCP loans depend on how much a car will be worth at the end of the PCP term and this loan enables you to borrow that desired amount for about three years. First, the borrower has to pay a deposit, about 10%, and then repay the remaining sum in monthly installments with interest on the agreed number of months. At the end of the term when all installments are done consumer can give the car back or buy it by using “a balloon payment”. This loan proves more expensive than buying the car outright but this loan enables people to get cars that they may not usually be able to buy immediately.
8. Child support and domestic debt
Loans for child and spousal support or alimony payments are also available and they aren’t eligible for bankruptcy discharge. These loans can be said a legal domestic support obligation as part of one’s divorce proceedings, and it can’t hold up in a bankruptcy claim. When someone gets divorced and the divorce agreement specified that he is responsible for his ex’s legal fees or credit card debt then he will not be able to discharge those in bankruptcy, either. But it also depends upon the place where you are living certain kinds of debt may lead to bankruptcy.
9. Medical Debt
Medical debts are not secured by property and sometimes don’t have an assigned payment period or structure. Most hospitals have a billing department, and you can set up a payment plan if you are not able to pay the full amount of your bill. The payment depends on doctor or hospital rules. If qualified medical expenses exceed 10 percent of adjusted gross income can be deducted from federal taxes.
10. Business debt
Financing or business debt means the funds borrowed to be used in business activities. The borrower can’t not losing ownership of the company as he is taking the loan. This is a time-bound activity because the borrower has to repay the loan with interest at the end of the decided period. The payments can be monthly, half-yearly, or even at the end of the loan possession.
A business loan can be secured or unsecured; if it is unsecured the line of credit is generally less. Debt financing is mostly used when a company needs a big loan and the owner of the company attaches the firm’s asset and the loan lenders value those assets and after that, the loan is given. This is one of the expensive ways of raising funds but it is a good option when interest costs are low and the returns are better. Any company also considers debt financing when they don’t have their capital.
As nearly every person encounters any of kinds of debt in his or her life. Today’s life can’t go with loans as the pace and competition is very fast and high. Students need loans for their education and also doing part-time jobs to meet their ends. Couples need a home for their family so they need loans to purchase a house and a car also. Someone in financial crisis also needs for his daily livings. Everything about Types of Debt is expplained above.
Credit cards are also necessary today and people can’t live without them so it is also debt and they have to pay their credit card bills regularly. So in short debt is very necessary but to avoid bankruptcy it is very important to be vigilant and make proper plans for living. Hope you love reading about “Types of Debt”
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Haley Hayward is an experienced writer at financemag7.com, where she’s credited with more than 200 articles covering everything from entrepreneurial stories to mental health at work.
She also oversees the Comment&Questions, which poses important admission questions to experts in the field, and regularly hosts webinars on various aspects of the business school experience.
Prior to joining financemag7.com, Haley honed her skills as a freelance writer, tackling a wide array of topics from petcare to car maintenance.
Haley holds a Master’s degree in English Literature from the University of Edinburgh, Scotland.