When we talk about debt, we tend to think of the total amount we owe regardless of how it was accumulated or to whom we owe it. Payday loan debt included. While some of us may define being in debt by our home mortgage or student loans, for others debt may be determined by our past financial mistakes. It doesn’t matter how much we owe, how long it will take to pay it off, or how we got there… it’s all considered debt. Only when we look at each type of debt individually can we understand all the different types of debt out there. That’s when we can respect the fact that whether we owe $1 or $1 million, to family or to the payday lender, we’re expected to repay what we borrow because it’s all considered debt.
*Mortgage Debt~ This type of debt is defined as a first mortgage on a home, a home equity line of credit, or any other type of loan secured by a property or real estate. A bond will be placed on the property until the loan is paid off. This type of debt can come with an adjustable rate mortgage (ARM) that will increase over time on a fixed rate that stays the same for the life of the loan. With a home equity line of credit, which can also be considered a “second mortgage,” the lender receives repayment only after the first mortgage is paid in full. The average payment term for a mortgage or line of credit is 15 or 30 years, but 10-year ARMs are also available.
* Car Loan ~ Going into debt with a car loan means borrowing a fixed amount for the purchase and then paying it off over a fixed period of time with a monthly payment (usually 24-60 months). The interest rate will be fixed for the life of the loan unless the borrower chooses to refinance for a lower monthly payment.
* Payday Loan ~ Payday loans are short-term, temporary loans meant to help people with emergency financial problems or unexpected costs. They are not guaranteed without the need for guarantees to be approved. Most lenders do not ask for credit history. Borrowers are expected to repay their loan with their next paycheck, but many times payday loan lenders will extend a person’s repayment period. Interest rates are higher than most loans and are fixed. Loan types are best for people who can pay off their loans quickly.
*Student Loan~ Most often issued by the federal government, this type of debt is used for higher education. Interest rates are typically much lower than other forms of debt, and repayment periods are typically 10 years, giving the borrower plenty of time to graduate, find gainful employment, and repay what they borrowed. These loans can have extremely high balances depending on where the borrower went to school, how many years it took them to finish their education, and how many degrees they pursued.
*Credit Card(s)~ This type of debt comes from purchasing goods and services without having to pay upfront. Creditors approve cardholders for a specified amount that they can use on a rotating basis as long as they make their monthly payment on time and at least the minimum amount required. Interest rates are based on the borrower’s credit score and can be some of the highest rates paid of all forms of debt.
While borrowing on credit can be a good and sometimes necessary financial tool, it’s important to understand how each type of debt works and what’s best for your individual financial situation.
