For many Americans, the word debt strikes a chord of utter anxiety. Many people associate the word with hefty financial burdens.
However, debt is a necessity for building credit. Paying your debts efficiently and quickly is the first step to establishing reputable credit, which allows you to make significant purchases.
Debt becomes less horrific when you understand the types of debt that exist. So, to arm you against ungrounded fears, we’ve prepared a short guide to explain these types. Let’s jump right in!
Types of Debt in Economics
In economic terms, debt comes in two primary categories: secured and unsecured. We’ll briefly explain these categories in this section.
Secured debt involves taking out a loan against physical assets. Most often, these assets include property or vehicles. If you fail to pay your agreed loan, the lender can repossess your property.
Because these loans are more tangible, their interest rates are often lower. These lower rates exist because the lender faces less risk. However, as the buyer, you face higher risks because you may lose the property you need.
In contrast, unsecured debt has no tangible assets. So, to reduce the risk for lenders, these debts charge higher interest rates.
If you fail to repay these loans on time, you’ll face increased rates. You’ll also face damage to your credit report and score. You can understand this risk better by further exploring credit systems.
Consumer Debt Examples: Credit Cards
Many consumers have standard debts they pay every month. The most obvious example of this would be credit card debt.
Credit cards are the most common type of unsecured debt; however, unlike other unsecured debts, you don’t have a set number of installments to pay. Because of this, you can pay for your credit cards at your own pace.
Many people see credit cards as bad debt examples because they can lead to burdensome interest rates. However, if you pay your credit card balances effectively, they can be examples of good debt.
Other Debt Examples
There are many other types of debt besides credit cards. Three of the most common include student loans, car payments, and mortgages.
Mortgages are often examples of good debt. When you buy a house, there’s a high likelihood that the home will appreciate over time. As such, when you sell the home, you can earn more than you paid in debt.
Car payments, in contrast, are often bad types of debt. The value of your vehicle depreciates the moment it leaves the lot. This depreciation makes it nearly impossible to turn a profit from this purchase.
Student loans, however, can be either good or bad. The question revolves around how long you have to pay for your loans.
If you can use your degree to climb the career ladder and deal with your debt, it’s good. However, if your student debt cripples you financially, it’s bad debt.
Strive for Good Debt
When you consider your debts, try to find types of debt that can work to your benefit over time. Good debts like mortgages and well-managed credit cards can provide you with reliable assets for affordable rates.
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