Debt is a reality in today’s America. Over the last five years, the rise in household debt has been startling. One survey revealed that eight in ten Americans said their household debt was either higher or the same as a year ago.
With rising interest rates, families are struggling like never before. But there is a light at the end of the tunnel. The first step to getting there is understanding the main types of debt and how to handle them.
Here’s what you need to know about the four primary types of debt.
4 Types of Debt and What to Do About Them
American debt rates are at all-time highs. According to USA Today, the average debt in America hit $101,915 in the third quarter of 2022.
As overwhelming as this number seems, help is available. Whether through debt relief California or independent financial advisors in Florida, you have options.
Here’s your roadmap to handling the four major types of debt.
1. Secured Debt
Secured debt is where the borrower puts up collateral to get approved for a loan. The most common example of secured debt is a mortgage. If you fail to pay your mortgage, your lender will take your home. Likewise, auto loans work the same way. Don’t pay off your car, and you lose the car.
However, if the seized asset doesn’t cover the debt, your creditor could still go after you in court for the remaining balance.
Despite the scary implications, secured debt often comes with lower interest rates, and the presence of an asset enables you to borrow more money than you otherwise would. Loans like mortgages and home equity loans can also see the interest written off as part of an annual tax deduction.
So, how can you handle this type of debt?
- Always pay at least the minimum amount due every month.
- Work with your lender if you struggle to keep up with the repayments. Most lenders don’t want the hassle of repossessing your home or care.
- Prioritize secured loans since they’re secured against your assets.
Generally, if you want to buy a home or car, you’ll have no choice but to take on secured debt, so don’t fear it.
2. Unsecured Debt
Unsecured debt is the exact opposite of secured debt. Your loan isn’t attached to any particular asset. Instead, lenders rely on your creditworthiness to determine whether they’ll give you a loan.
This type of debt is the most common consumer debt Americans assume because it includes medical bills, personal loans, student loans, and nearly all credit cards. Regarding credit cards, this is the bane of the average American, with 55% of Americans admitting they were concerned about their ability to pay them off.
However, even though an asset doesn’t back unsecured debt, creditors can still seize your property via a debt collection agency or court judgment.
Generally, unsecured debt can be avoided by only using your credit card to build your credit score. To do this, make a few purchases monthly with money you already have so that you can pay it off before the interest rates kick in.
However, most financially savvy people will try to avoid taking on unsecured debt entirely.
3. Revolving Debt
Revolving debt can be secured or unsecured. With a revolving debt, you can permanently borrow up to your credit limit. Each time you pay down your debt, you can continually borrow more up to your maximum limit.
Credit cards are the most prominent type of revolving debt, but a type of secured revolving debt is the Home Equity Line of Credit (HELOC). Your minimum monthly repayment amount will fluctuate based on how much you’ve borrowed.
Although this is a highly convenient form of debt, it’s easy to get carried away. Follow these tips to avoid getting snowed under by revolving debt:
- Keep a careful watch on your spending.
- Only borrow if you’re sure you can pay it off in the short term.
- Try to pay off your balance in full every month.
4. Installment Debt
Finally, there is installment debt. This is technically nothing more than a type of non-revolving debt. Most personal loans are installment debt because you can only borrow a set amount each time you’re approved.
For example, if you take out a $20,000 debt consolidation loan to pay off some high-interest debts, you can only borrow $20,000. Plus, you’ll pay back a set amount of money each month until the end of the defined period.
Like revolving debt, installment debts can be secured or unsecured. This is why they also include mortgages, auto loans, and student loans.
So, what’s the best way to manage installment debts?
- Always pay in full every month on time to avoid getting swept away by rising debt.
- Try to make payments every two weeks instead of every month to cut the time it takes to pay off your loan and reduce the interest rate hit.
- Pay more than the minimum each month for an aggressive debt management campaign.
- Make one extra payment every year.
- Refinance the loan to get a lower interest rate, particularly with larger debts like mortgages.
How to Manage Debts if You’re Having Trouble
Sometimes, circumstances outside your control can land you in financial hot water. The worst thing you can do in this situation is to bury your head in the sand and hope the problem resolves itself.
The best advice is to seek professional support as soon as possible. For example, credit counseling agencies can develop innovative solutions to empower you to handle your finances better.
Furthermore, explaining your situation to your lender early may win you some breathing space or a lower interest rate. Ultimately, lenders don’t want to send you to collections. They just want their money with as little fuss as possible.
Know Your Debt
Knowing about the various types of debts can help you create an action plan to deal with them. Moreover, it can serve as a benchmark for changing up your credit mix, which makes up 10% of your credit score.
What are you doing to handle your debt?