It can be very stressful when taking on new debt, so it’s extremely useful to understand what types of debt there are. In this post, we’ll talk about these kinds of debt and what they mean to debtors.

Secured and Unsecured Types of Debt

One can break debt down into two categories: Secured and Unsecured. Firstly, Secured Debt “secures the interest of the creditor” in the sense that it’s backed by collateral from the debtor. Types of collateral include houses, cars, and other assets that the creditor can sell if debtors defaults on their loan. In essence, there is more risk for the debtor in this case, as they may lose their property if they can’t afford the debt anymore.

On the other hand, secured loans have benefits such as lowered interest rates and access to larger loans. These benefits exist exactly because there is less risk to the creditor (as there are assets backing the debt).

Unsecured Debt (like credit card debt) involves more risk on the creditor’s behalf. This is because debtors don’t have to give up any property if they cannot afford the debt. Since there isn’t a guarantee that the loan can be paid off, interest rates are also typically much higher. Additionally, it can be much harder to qualify for this type of loan, as debtors need good credit scores.