Types of debt

3 May2011

There are many different types of personal debt - credit card debts, overdrafts, personal loans, mortgages... the list could go on. However, they all fall into two general categories: secured debts and unsecured debts. The consequences of failing to repay each type of debt are different.

Secured debt

A secured debt is any debt which is placed against one or more of your `assets`. A common example is a mortgage, which is secured against your home. This means that if you can`t repay your mortgage, your home may be sold to recover the money you owe your mortgage lender.

It`s also possible to get secured personal loans, which can be larger than unsecured personal loans, and tend to carry a lower interest rate, since the borrower`s assets provide an extra level of security for the lender.

Unsecured debt

An unsecured debt does not involve any of your assets as part of the deal. This means that if you struggle to repay what you owe there will be a much lower risk of losing your home (although that can end up happening) but there can still be serious consequences for failing to keep up with payments.

Examples of unsecured debts include most personal loans, credit cards, overdrafts, store cards, catalogue debts, and so on.

If you`re not sure whether your debts are secured or unsecured, check with your lender (although it`s very unlikely that you wouldn`t know a debt is secured against your property).

Debt help for secured and unsecured debts

Most debt solutions can`t help directly with secured debts. If you run into difficulties repaying a secured debt, you should talk to your lender, who may help you find a way of addressing your problems.

However, it`s different for unsecured debts. If you can`t afford payments to those debts, your unsecured lenders may agree to a debt solution that makes your unsecured debts more affordable, such as a debt management plan or an IVA (Individual Voluntary Arrangement).

If you have a combination of secured and unsecured debts, these debt solutions still wouldn`t directly help with your payments to your secured debts, but they could help to make them affordable again - by reducing the amount you`re required to pay towards your unsecured debts every month.

Keep in mind that your lenders don`t have to agree to any particular debt solution, but may do so if it`s clear you can`t afford to repay your debts any other way. Also remember that any debt solution that involves paying less each month than you originally agreed will have an impact on your credit rating.

For more information on the various debt solutions available, click here. Or to find out which solutions could help you, take our simple debt test.

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Tags: debt, types of debt, type of debt, secured debt, unsecured debt

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