In a world driven by impulse buying and irresistible advertisements coupled by the need to have the best in life, staying out of debt can be a herculean task so to speak. In fact, it’s correct to say that we all are in some kind of debt. The difference between the kind of debt one has from the other is if it’s manageable or not. That notwithstanding, it’s important that you understand the kind of debt you have. There is a difference between mortgage or car loan debt as compared to a credit card debt.
An understanding of the kind of debt you have makes it easy to plan your finances in terms of which kind of debt you should work on repaying before everything else. In any case, each type of debt has a certain commensurate impact on your finances as well as your reputation. An ignorant approach to debt can easily get you into financial trouble hence the need for you to understand the types of debt you have and how to effectively manage your finances to keep the same debt at a manageable level.
Unsecured vs. secured debts
It is extremely important that you understand the type of debt you are embroiled in. Basically, there are two types of debts – secured and unsecured debts. A secured debt as the name implies is the kind of debt borrowed against a collateral/security. Examples of secured debt include mortgage loan or a car loan. You cannot be advanced secured debt if you lack collateral as a fall back plan for the lender should you be unable to repay your debt.
Unsecured debt on the other hand is not supported by any collateral and in the case that you are unable to repay your debt, you lender or creditor can threaten you, penalize you by adding hefty interest rates or simply pursue legal action. You do not risk losing any of your precious assets because the debt itself is not backed by a security. Credit card debts are examples of unsecured debt and this is why in the event you are unable to clear your credit card debt, a credit card agency might sue or simply enlist the services of collection agencies to recover their money. Perhaps the distinction between secured debts and unsecured debts is the fact that unsecured debts tend to attract high interest rates due to the lack of collateral to back them up.
Installment debts vs. revolving debts
Another distinction when looking at debts is of course how a person ends up repaying for the debt say on a monthly basis. For installment debts, you basically have an idea of the amount of money you are supposed to pay each month. There is a fixed amount of money you repay to the lender every single month hence making it easy for you to plan your finances. Mortgage or car loans are examples of installment debts where you pay a fixed amount of money monthly.
The greatest advantage of installment debts is that you don’t have to deal with surprises because you have a clear idea of the amount of money you will be paying on a monthly basis. Revolving debts on the other hand are the opposite of installment debts as they do not ascribe to the monthly payment philosophy. An example of a revolving debt is the credit card debt as this kind of debt is made based on a given percentage of the total money you owe on a given month. The percentage of the amount you owe could be anywhere between 2 and 5%.