Types of Debt
What are the different types of Debt?
This is a great question! You’d be surprised how many people don’t know the difference between “secured” debt and “unsecured” debt
Definition of ‘Unsecured Debt
A loan not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and any other type of loan or credit that was extended without a collateral requirement. It presents a high risk for lenders since they may have to sue to get the money they’re owed if the borrower doesn’t repay the full amount owed.
As a result of this high risk, unsecured debt tends to come with a high interest rate.Unsecured debt can be wiped out by sequestration / bankruptcy.
Unsecured debt – There is no asset to secure the financing. This financing is usually done according to your potential income. This debt is usually also the last debt to be paid when someone is in financial difficulty The risk of not paying this debt is the creditor garnishing your income. This debt can only be eliminated by sequestration / bankruptcy.
Definition of Secured debt – A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. Secured Debt – Any financing that has an asset that you can lose if the creditor is not paid.
- Bond – Any Property: House, flat, or land
- Vehicle – All finance agreements but does not include rental/lease agreements.
- Furniture accounts – While there is an outstanding balance; the furniture is the asset
- Loans with a ceded policy – Any loan that has an insurance policy ceded as security.
- Loans with a ceded asset – This could be a vehicle or jewelry or and item of value.
Short term loans