Three Specific Types of Debt

Lenders, creditors, and consumers in the United States all try to use three main categories when they identify the types of debt. Beneath these three essential categories will be the other types of debt. This is when the matter becomes very confusing because then debt becomes more varied and based upon each consumer and their needs. An attempt must be made to identify the three basic debt categories and explain how they work for the consumer.

Debt is often first categorized by whether it is secured or unsecured debt. These terms are based on the presence of collateral for the debt. Collateral is the security on the loan or other form of credit. A secured debt is one in which collateral is involved in the process of the transaction. If you owe on a loan which was purchased by using security or collateral such as a house or car, then you have a secured debt. A car loan or a home loan is a secured debt. The most common form of an unsecured debt is your credit card. If you obtain an unsecured loan from a bank or other lending institution, the amount you owe is unsecured.

Debt is also categorized as being installment debt or revolving debt. The payment schedule is what determines whether the debt is one or the other. When you are making a car payment or house payment you are making a monthly payment for a certain amount. The payments are installment payments, thus it is an installment debt. When you have a credit card with a balance on it, the balance will change or fluctuate depending on how many charges are made with it throughout a specified time period. This is what a revolving debt is. The total amount that you owe on the credit card debt will always change from month to month.

Installment debt can be a more preferable type of debt because there is no risk of increasing your debt amount. If you are buying a car for a specific price you need not fear that the price will change the next month. The payments are an established amount and will be the same every time. This adds to the safety and stability of your budgeted expenses for each month.

Your debts may also be categorized according to the source of the debt. The different types of credit cards offered are prime examples of what this category means. Although a card may be issued by a financial institution, a department store or through an online service, it may be the same type of card. American Express, VISA, or Master Cards are all offered through these sources, but there may be differences between them based upon the individual distributor.

The most common differing factor will probably be in the interest rate charged. The rates offered by the banks or another provider will usually be lower than that offered by a retailer. There may be other differences depending on the individual issuer, so it is always wise to become well informed on these differences before you apply for the card.