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In order to be able to manage your debt you must first be able to understand debt. This article will define basic debt terms, explain different types of debt, and give you tips on how to tell if you have a debt problem. Understanding debt can help you avoid debt.
Debt is one of the most pervasive things in our society today. It is very important to understand the basics of debt. Whether you have a debt problem or not, more knowledge of what is involved is a good idea, since it can help you make better, more informed decisions.
Basic debt terms
The first part of understanding debt is knowing basic debt terms. Most of these have to do with who is involved with your debt:
Types of debt
It is very important to understand the differences between the two main types of debt. Understanding debt can help you learn about which types of debt will work better for you.
Unsecured debt: This type of debt is debt that is not tied to anything tangible. You borrow without anything to back it up. Credit cards, medical bills and signature loans are examples of unsecured debt. If you default, your creditors can sue for repayment, and take what you have available in capital. However, they can't take any of your tangible assets, such as your home, and you cannot be forced to sell your home to pay off unsecured debt.
Secured debt: On the other hand, secured debt is tied to assets. If you get a car loan, the debt is secured by your car. A mortgage is secured by your home. In some cases, a secured credit card may be tied to a savings account that must maintain a minimum balance. With secured debt, the creditor can take your asset if you default. If you don't make car loan payments, the car is repossessed. If you miss enough mortgage payments, your home is foreclosed upon.
As you might guess, unsecured debt carries a higher interest rate than secured debt. This is because there are not fallbacks for creditors if you fail to pay. Creditors can recover a great deal of their losses if you fail to pay on a secured loan. Unsecured debt is riskier. However, it is also easier to get, since it is usually in smaller amounts, ranging from $500 to $5,000. Secured loans are usually for much larger amounts.
How can I tell if I have a debt problem?
When you are in debt, paying interest charges, it can be a drain on your resources. Often, when you pay only the minimum, most of your payment goes to interest, and the debt only gets smaller at a slow rate. If you have a debt problem, it can put a serious strain on your financial situation. It is important to recognize the signs of a debt problem:
If you have a debt problem, you may need to create a plan to eliminate your debt, or seek third-party financial assistance. But the first step is understanding debt.
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