The Ultimate Guide to Understanding Personal Debt

consumer debtDoes trying to understand the different types of debt, categories, and terminologies feel like finding your way out of a complex maze?

You are not alone. Deciphering the various types of consumer debt and their categorizations can be challenging, even for the informed consumer.

But these things are important to know.

Why? Because greater understanding will not only empower you to overcome your debt (pay it off), but enable you to use it for your advantage.

Follow along as we demystify the various terms used to identify and categorize consumer debt. Be equipped to manage your debt better. This could be the missing piece to end the debt cycle for many!

So, what is debt?

Debt is borrowed money between two parties (the lender and borrower) intended to be paid back, with interest (in most cases). It can be taken out by corporations, governments, and individuals. Banks, individuals, governments, and corporations (like credit card companies) can also act as lenders.

However, this article is to educate you about consumer debt specifically.

The Main Categories of Consumer Debt

There are different types of debt you can carry (we’ll cover more about that here in a minute). But equally important is knowing which category your debt falls under. Knowing which category your loan belongs to can help you prioritize your debt more accurately.

The two main categories of consumer debt are secured and unsecured debt. Secured debt is debt with collateral. This means that if you fail to pay it back, your lender can go after your assets to recover losses.

Unsecured debt doesn’t give creditors the power to go after your assets. However, they can sue you for any unpaid balance. Knowing your debt category will help you prioritize your lines of credit so your assets are not at risk for collateral.

different types of personal debt

  • medical debt
  • credit card debt
  • student loans
  • personal loans
  • mortgage loans
  • payday loans
  • cell phone bills
  • utility bills
  • bank overdraft charges
  • auto loans
  • tax debt

Whether secured or unsecured, your debt is your responsibility. Prioritize your secured debt to protect your personal property and other assets.

If you’re struggling with making payments, it’s best to inform your creditors. Ignoring the situation and avoiding your creditors will only make things worse.

Know your rights and protections under the Fair Debt Collection Practices, which prohibits debt collectors from using abusive, unfair, or deceptive practices to collect from you.

But also be aware of the statute of limitations. If your loan has a statute of limitations, your creditor can sue you for unpaid debt.

Defining the plethora of debt terminology

For even more clarity, let’s define some of the different terms linked to consumer debt.

What is consumer debt?

Definition: Consumer debt, also known as consumer credit, is debt owed by you or I, rather than a government or business. This is debt acquired from funding consumption of goods (depreciating assets), not an investment (or appreciating asset).

There are two types of consumer debt: 

revolving debt and non revolving debt

Interesting fact: “Today, roughly 24 percent of personal expenditures in this country are made with credit and debit cards.” – RadicalMath

What is revolving debt?

Definition: Revolving debt is a revolving credit loan that does not have a fixed number of payments. A great example of this kind of debt is credit card debt.

Interesting fact: In January of 2017, the outstanding revolving debt in the U.S. was $992.4 billion, according to Credit Donkey.

What is non revolving debt?

Definition: Non revolving debt, also referred to as non revolving credit, is an installment loan given in a lump principle sum and the borrower pays back the principal with interest on fixed dates. Unlike revolving credit, once used, it can’t be used again. Examples: car loans, student loans, mortgages.

Interesting fact: “53% of student loan borrowers say that their debt isn’t worth the education they received.” Reports

Household debt is dangerously close to 2008 levels – CNN Money

What is household debt?

Definition: Household debt is the total amount of debt owed by all adults in the household. That includes consumer debt and mortgage loans.

Interesting Fact: “Total household debt climbed to $12.58 trillion at the end of 2016, an increase of $266 billion from the third quarter, according to a report from the Federal Reserve Bank of New York.” – CNNMoney 

That’s just shy of the 2008 average household debt of $12.68 trillion.

What is personal debt?

Definition: Personal debt is any outstanding debt you are personally responsible for, as opposed to that of a business. Personal debt can include multiple parties. For example, you and your spouse can have a joint credit card account or car loan.

Interesting fact: Credit card, auto, and student loan debt combined are now over $3.3 trillion in the U.S.

What is secured debt?

Definition: Secured debt is a loan that is guaranteed by collateral, or assets that the lender can take to cover losses when the borrower can’t make payments.

What is unsecured debt?

Definition: Unsecured debt is debt issued with no collateral. This means that if the borrower struggles to make payments, the debt collectors are not able to go after personal properties or assets (at least not without getting judgment in court).

Fact: “There is now $1.3 trillion in outstanding student loan debt.” – The Colombian

What is collateral? 

Definition: Collateral is security for getting repayment of a loan. This would be an asset a lender may take to cover losses when a borrower fails to pay on a loan, like a car or a house.

“But when we use positive adjectives to describe debt we minimize the financial bondage it creates.”

What is the Fair Debt Collection Practices Act?

Definition: FDCPA is a policy set by the government to protect borrowers from illegal practices that may be carried out by creditors to motivate borrowers to pay up.

Interesting fact: “A woman from Kansas City sued a debt collection agency that was pursuing her for $1,000 in credit card debt that wasn’t hers. The jury awarded her nearly $83 million in punitive damages and fined the debt collection agency $250,000 for violating the FDCPA,” Abc7 reports.

What is good debt?

Definition: Good debt is put towards an investment (or appreciating asset) that will grow in value and or bring a long term return is considered a good debt. Example: mortgage or student loan

“But when we use positive adjectives to describe debt we minimize the financial bondage it creates.”

-Michelle Singletary

What is bad debt?

Definition: Bad debt is put towards a depreciating asset, not an investment.
Example: credit card debt

What is fixed interest rate debt?

Definition: Fixed interest rate debt is debt with an interest rate that doesn’t change for the life of the loan.

What is variable interest rate debt?

Definition: Variable interest rate debt, also known as floating interest rate and adjustable interest rate debt is debt with an interest rate that is subject to change over the life of the loan, like credit cards.

The fact is, debt is more of a trap than leverage for most people. Understanding the nature of debt is the first step in taking control of it. Bookmark this page and use it as a reference as needed!


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