Types of Debt
Not all debt is the same. This is a difficult concept when you are barely able to pay your creditors during each pay period. However, understanding the different types of debt can allow you to borrow more wisely, mange your debt better, and eventually eliminate the less desirable types of debt.
One type of debt is personal debt. This type of debt buys a short-term pleasure for now with money you may or may not earn in the future. In addition, many of these goods will lose value over time, i.e., a new car or new furniture will be worth much less in a couple of years than when they are purchased. Other items that are in this category are clothing and vacations. It is not always possible to pay cash for a car or other large item that is necessary. In those circumstances, you should shop for the best rates and pay the debt as quickly as possible to reduce the interest spent.
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Whatever you buy with a credit card that is used now, but that isn’t paid in full during that payment cycle, forces you to continue to pay back the principal and interest on the item long after it is used up. For instance, you may charge your groceries and dinners out on a credit card. If you don’t pay your balances in full on the charges each month and instead carry a balance on your credit card, you will continue to pay for that food long after it has been consumed. Items that are monthly expenses should be budgeted for and paid out of that month’s income.
Personal debt can be either secured or unsecured debt. An example of secured debt is a pawn loan. The borrower gives the lender an object such as a piece of jewelry to hold in a safe place. In exchange, the lender gives him or her an amount of cash. At the end of the loan period, the borrower either pays back the cash and a fee for the loan or forfeits the item. Another example of this type of loan is a mortgage. If the owner does not make the mortgage payments, the bank may foreclose on the loan or take possession of the house. An example of unsecured debt is a credit card balance. If the borrower defaults on the payments, the credit card company cannot seize the property of the borrower. Because of this limitation, interest rates are usually higher on this type of loan.
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Another type of debt is called investment debt. This kind of debt is for an item that will increase in value over time. A mortgage on a house is this kind of debt. One reason people buy a house instead of rent is they hope that the value of the house will increase over time. Another example of this type of debt is a loan for college, since the anticipated increase in earning power is greater than the original debt. Investment debt can be deducted from income taxes, making it desirable debt in a number of ways.
Understanding the types of debt allows a consumer to choose to take on more desirable types of debt and avoid those kinds that are less advantageous.
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* Cash-Advance-USA.org provides information and research on cash advances/payday loans. We are not a payday lender or broker, nor are we necessarily affiliated with the companies profiled on this site. Not all products and services are available in each state.
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