Most people encounter some form of debt at one point in their lives. Debt is available in several forms, but all debt can be categorized within a few main types including secured debt, unsecured debt, revolving debt and mortgages. Not all debts are equally created; therefore, some are considered better than others.
This is any debt supported by an asset for security purposes. For the lender, a credit check is necessary to judge how responsibility you handle debt, but the asset is pledged to the lender in case you are unable to repay the loan. To illustrate, if you are in the requisition of a loan to purchase a car, the lender supplies you with the cash relevant for the purchase of it, but even places a lien, or claim of ownership, on the title of the vehicle. In case you are unable to make payments to the lender, it can repossess the car and sell it to recoup the funds. Secured loans such as this one are having an interest rate that is fairly reasonable, and is on the basis of your creditworthiness and the security value.
There is no security in unsecured debt. When a lender makes a loan with no asset held as security, it does so only on the faith in your ability and promise to reimburse the loan. Granted, you are still bound by a contractual agreement to reimburse the funds, so if you default, the lender can sue to reclaim the owed money. Doing so comes at great cost to the lender, but, so unsecured debt is generally available with a higher rate of interest. Some examples of unsecured debt are inclusive of credit cards, signature loans, contracts of gym membership contracts and medical bills.
This forms an agreement as tailored in the midst of a lender and consumer that enables the consumer to have access to an amount up to a maximum limit on a recurring basis. A line of credit and credit card are examples of revolving debt. A credit card has a credit limit, and the consumer is free to spend any amount below the limit until the limit is reached. Disbursement amounts for revolving debt vary on the basis of the amount of funds currently on loan. There can be insecurity of revolving debt, as in the instance of a credit card, or secured, such as on a home equity line of credit.
Probably, mortgages are the most common and largest debt carried by many consumers. Mortgages are loans formed for the purchase of homes, with the subject real estate serving as collateral on the loan. Typically, a mortgage has the lowest rate of interest of any consumer loan product, and the interest is tax deductible for those who itemize their taxes. Most commonly, mortgage loans are issued at 15- or 30- years terms to keep monthly disbursements affordable for homeowners.
Sometimes, you may have the intention of repaying but things don’t go your way and you end up being indebted to the individual or a bank. Debts are always classified into various categories.