Defining and understanding types of debt

What is debt? Simple: It’s money you borrowed from someone but haven’t yet repaid in full. In other words, it’s a loan or credit.

Types of loans

There are two main types of loans. Secured loans require collateral while unsecured loans do not. Collateral is something of value, like a house, car or certificate of deposit, that's held to ensure payments are made on time.  

A lender could take possession of the item if the loan isn’t paid as agreed. Common examples are mortgages and vehicle loans. A mortgage loan is mostly an installment loan but with some differences. 

There are a variety of different mortgage types. A fixed-rate mortgage is probably the most common. This means the loan has the same interest rate for the entire term.  Whereas with an adjustable-rate mortgage, the interest rate you pay changes periodically. There are also balloon mortgages where, after a certain number of years, you will be required to either refinance or pay the remaining balance in a lump sum.

Mortgage payments can include more than just the loan amount. You may find taxes, insurance and other costs rolled in as well.

Loans made without collateral are unsecured. They tend to carry higher interest rates than secured loans. Examples are personal loans or student loans. 

Credit cards can fall into either category. Secured credit cards are secured by a cash deposit. They can be a good option for people who are establishing their credit or rebuilding their credit scores. Unsecured credit cards function the same way but without a cash deposit.

Another way to describe the kinds of credit is in the way they are repaid:

  • Installment loans require a set number of payments, usually equal amounts, over a specified number of months or years.

  • Revolving credit — the kind used for credit cards — is reusable. Once you pay down the balance, you are free to use your remaining credit limit.

Some people use the words “loan” and “debt” interchangeably. Technically, though, a loan is the total amount you borrow. Debt is the amount you still owe. The difference depends on how much you’ve already paid back.

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