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Types of Debt

About Debt

Part of managing debt effectively includes knowing exactly what debt is and what the different types of debt are. This knowledge can help you to effectively negotiate with creditors, explore options for getting out of possible trouble, and refinance or consolidate various debt when the time comes.

Secured Debt

Secured debt is debt that is secured by tangible property that your lender can take possession of to settle the debt if you default on your payments. Usually secured debts are car loans or mortgages for homes and property, but short-term loans offered by pawn shops are also secured loans.

Secured loans have one major advantage over unsecured loans in that they represent less risk to the lender, since they can always size the property if you default on the loan. In consideration of this protection, lenders usually offer secured loans at a lower interest rate than they do for unsecured loans. Mortgage loans in particular usually have the lowest interest rates for any type of loan available on the market.

Unsecured Debt

Unsecured debt is debt that has no asset to back it up by way of physical property. Extended on credit, unsecured debt presents a higher risk to a lender since - in the United States - there are no debtor's prisons and if a borrower defaults on a loan, there is little that a lender can do about it except seek costly legal action and report to the credit reporting agencies. Unsecured debt includes credit cards and personal loans. Credit cards in particular can have the highest interest rates to be found on the market, sometimes getting as high as 35% APR.

Unsecured debt in the form of credit cards is generally the easiest way to improve your credit. By securing a card, using it, and paying off the card without fail on a regular basis, your credit score will see a significant boost.

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