We know that debt can be scary, but it’s a part of modern life, and it doesn’t need to be something to fear. Understanding how debt works is the best way to start overcoming your fears and seeing it in a new light. Part of the success of being able to turn your life around and regain financial freedom lies in understanding exactly what debt means.
By improving your understanding of debt, you’ll not only be more knowledgeable about your situation, but you’ll also learn how to manage your money and repay what you owe in a way that is most suitable for you.
Many people assume that all debt is the same, and that all debt should be approached in the same way. This isn’t actually the case. The way in which debt is accrued and repaid varies according to what kind of debt it is. Let’s take a look at the different types of debt to help you understand your own debt a bit more clearly.
Types of debt
Secured debt
A secured debt is taken out against the value of the asset you are purchasing or an asset you already own, such as a house or car. If you do not pay off the debt, your asset may be taken by the creditor as payment. Secured debts do not spiral in the same way as unsecured debts, but they can risk the loss of property and possessions if not handled correctly.
Secured debts include:
- Mortgages
- Car financing
- Secured personal loans
It is important that you maintain payments to your secured debts, or you will run the risk of losing the assets that the debt is secured against. For this reason, secured debts are seen as priority debts.
Unsecured debt
This is the most common kind of debt. It is called “unsecured” because your debt is not guaranteed against anything — such as a valuable asset, like your home — should you fail to pay. Instead, the debt is managed exclusively through payment contracts. If you fail to pay off unsecured debts, your creditors will have to undergo legal proceedings if they want to take action against you.
Unsecured debt has a habit of spiralling out of control, because, as the debt continues to go unpaid, the interest adds up, significantly increasing the original amount owed.
Unsecured debts include:
- Credit cards
- Personal loans
- Overdrafts
- Payday loans
- Medical bills
- Student loans, although these are treated differently to other types of debt.
If your debts are getting out of control and you are unable to keep up, we recommend making a list of all the debts you owe, including both the total amount and the minimum monthly repayments. This can be a scary process, but moving towards a financially-free future starts with this single step.
Using what you’ve learned above, see if you can sort your debts into ‘secured debts’ and ‘unsecured debts’. Once you’ve done this, you will need to prioritise your debt repayments – for more information on how to prioritise your debt, read our guide explaining which debts you should repay first.
At Debt Movement we provide professional debt guidance and solutions that help you move out of debt. We offer non-judgemental financial guidance to relieve the burden of financial strain and offer support on your journey to financial freedom. Request a free call back today.
