A Comprehensive Guide to Secured, Unsecured, Revolving, and Installment Debt

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Understanding Debt: A Comprehensive Guide

For better or for worse, debt is a common part of life. Borrowing can make it possible to buy a home or car, attend school, and finance other large purchases. While debt can be useful for achieving various financial goals, it can also become a burden if taken on for the wrong reasons or without fully understanding the terms.

What Is Debt?

Debt is money you borrow and then repay to another party, often called the lender or creditor. When you take on debt, you usually agree to a contract specifying when you’ll repay the debt, plus how much interest and other fees you’ll be charged in exchange for borrowing.

Secured Debt vs. Unsecured Debt

What Is Secured Debt?

A secured debt is a loan backed by valuable property, known as collateral. This could be a house or a car. If you stop making payments, the lender can seize the property you’ve offered as collateral. Examples include home mortgages and auto loans.

What Is Unsecured Debt?

An unsecured debt is a loan that isn’t tied to any collateral. Credit cards and medical bills are common examples. Personal loans can also be unsecured, though some may require collateral.

Secured vs. Unsecured Debt

Whether to take out a secured or unsecured loan often depends on what you can qualify for based on your creditworthiness, income, and other factors. Unsecured debts are riskier for lenders, so they often have stricter credit and income requirements. Secured debts, on the other hand, usually offer lower interest rates.

Revolving Debt vs. Installment Debt

What Is Revolving Debt?

Revolving debt, such as a credit card or home equity line of credit (HELOC), allows you to repeatedly borrow and repay money up to a set credit limit. You can charge purchases up to the limit, then repay your balance—usually with interest—with some flexibility.

What Is Installment Debt?

An installment loan is a loan you receive in a lump sum and then repay with set terms, typically in equal installments with a fixed interest rate. Common examples include personal loans, student loans, mortgages, and auto loans.

Revolving vs. Installment Debt

Revolving debt offers flexibility, allowing you to access and repay your debt as needed. Installment debts, however, typically offer fixed interest and predictable monthly payments, which can be more manageable for some borrowers.

Types of Consumer Debt

Different credit products are intended for different purposes. Here are the most common types of consumer debt:

• Credit cards
• Personal loans
• Mortgages
• Home equity loans and HELOCs
• Auto loans
• Student loans

How to Pay Off Debt

If you’re shouldering a large balance, getting out of debt can be a challenge. Here are some steps you can follow to pay off your debt:

1. Take Inventory of Your Debt

Make a list of everything you owe, noting your balance, interest rate, and minimum monthly payment. Getting clear on exactly what you owe makes paying off debt easier to visualize.

2. Budget for Repayment

Create a plan for how you’ll budget your money toward expenses, debt, and saving. Consider the 50/30/20 budget or another budgeting plan. If money’s tight, look for ways to cut back spending or increase your income.

3. Consider a Repayment Strategy

There are various approaches to paying off debt: the debt avalanche method, debt snowball method, and the lesser-known debt snowflake method. If you have high credit scores, consider a debt consolidation loan or a balance transfer credit card.

4. Consider Credit Counseling

If you need help charting a course out of debt, consider seeking out a nonprofit credit counseling service. Credit counselors can help you devise a plan for repayment and assist with budgeting and other personal finance basics.

The Bottom Line

Being an informed borrower can help you keep debt working in your favor, rather than becoming burdensome. Build up a working knowledge of the types of debt and how they work before you apply to borrow. That way, you can feel confident that you’re applying for the right type of credit for your goals.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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