Taking on debt is what we refer to when someone borrows money and promises to repay it. Student loans, mortgages, and credit card purchases are likely examples you’re already familiar with. However, it’s likely that you may not be aware of the fact that these loans actually fall under various debt categories. The four main categories of debt are secured, unsecured, revolving, and installment. And, as you’ll see, categories often overlap. Keep reading to learn more about how debt is classified.
1. Secured Debt
Secured debt refers to a type of debt that is supported by an asset used as collateral. When borrowers fail to repay the loan, the lender can claim the asset that was pledged as security. This provides the lender with the option to seize the asset as a means of recovering their funds.
To avoid or resolve issues with secured debt, consider these four tips:
- Always make your loan payments on time and meet at least the minimum requirement.
- Inform your lender if you’re facing difficulties in keeping up with payments.
- If necessary, consider selling your property. For instance, if your car is about to be repossessed, selling it to pay off the debt can help you avoid repossession costs and prevent negative marks on your credit report.
- To get out of the debt trap reach out to your lender if you’re struggling to make payments. Contact them immediately, especially for mortgage payments. The lender may offer temporary payment reductions or put payments on hold to help you catch up. They might even consider modifying the loan terms to lower your monthly payment.
2. Unsecured Debt
Loans that don’t require collateral are referred to as unsecured debt. The ability of the borrower to repay the loan is what the lender is relying on. If you have unsecured debt, you have the choice to manage your finances by pursuing debt settlement or consolidation.
The goal of debt settlement is to lower your overall debt burden. It is especially helpful for people who are drowning in debt and want to take back control of their finances. A debt settlement professional can negotiate on your behalf with your creditors to possibly lower your balances.
Debt consolidation, on the other hand, enables you to combine numerous unsecured debts into a single loan and payment. This strategy streamlines your debt obligations and might even result in lower interest rates.
3. Revolving Debt
Revolving debt offers the flexibility of using a credit line over time. With this type of debt, you can borrow, repay, and borrow again as needed. Instead of adhering to a fixed payment schedule, your payment amount depends on your current borrowing balance. Credit cards are a common example of revolving debt, and home equity lines of credit also fall into this category.
To avoid or overcome issues with revolving debt, consider the following tips:
1. Monitor Your Spending: Keep a close eye on your expenses to prevent overspending and accumulating excessive debt.
2. Pay in Full Monthly: If possible, aim to pay off your entire balance each month. If not feasible, strive to pay more than the minimum amount due and ensure every payment is made before the due date.
3. Prioritize High-interest Debt: If you’re struggling to repay your debt, focus on tackling the higher-interest debts first. This approach, known as the debt avalanche method, can save you money on interest charges in the long run.
4. What Is Installment Debt?
Revolving debt provides the flexibility to use a credit line gradually over time. On the other hand, installment debt follows a fixed payment schedule. With installment debt, you know the exact amount you’ll pay each month and the duration of those payments even before receiving the funds. Unlike revolving debt, you receive the entire loan amount upfront instead of borrowing as needed. Common examples of installment debt include mortgages and car loans.
To avoid or overcome challenges associated with installment debt, here are five helpful tips:
1. Timely and Full Payments: Make sure to pay on time and in full for each payment, ensuring you meet your obligations.
2. Bi-weekly Payments: Instead of monthly payments, consider making payments every other week. This approach can shorten the loan duration and reduce the overall interest paid.
3. Increased Monthly Payments: Accelerate the payoff process by adding extra money to your monthly payment. For example, if your car loan requires a 10,000 INR monthly payment, consider paying 15,000 INR by adding an additional 5000 INR.
4. Extra Annual Payment: If bi-weekly payments or higher monthly amounts are not feasible, consider making one extra payment each year. This reduces the loan term and decreases the amount of interest paid.
5. Refinancing the Loan: Explore refinancing options if you can secure a lower interest rate. Refinancing can help shorten the loan duration and minimize the overall interest paid.
By following these tips, you can effectively manage installment debt and potentially reduce the financial burdens associated with it.
Author Bio: Tanvi Kaushik specializes in Content Marketing and works with the Digital Team at KreditBee – India’s fastest personal loan platform where self-employed and salaried professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Tanvi writes to-the-point articles on personal finance and budgeting which are truly appreciated by her readers. She is committed to making money matters easy to understand even for the layman. Her commitment to her work doesn’t stop her from pursuing her hobbies of hiking, trekking, and going on adventurous trips.
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