Knowing the different types of debt is important if you want to be able to strategically pay them off. They have varying needs and qualities that you need to understand so you can deal with them specifically.
Debts are defined under two different classifications. One classification involved being either a secured or unsecured debt. The other classification involves a debt being revolving or non-revolving.
Secured vs Unsecured
In a separate page on this website, we discussed the difference between a secured and unsecured type of debt. To know more about them, visit the Personal Loans page. For this article, we will be concentrating on the other type of classification.
To give you a brief summary, a secured loan is characterized by the need for collateral. This provides the lender the security that the borrower will pay them – lest they risk losing the collateral placed on the line. On the other hand, an unsecured loan is characterized by the absence of collateral. The security of the lender is placed upon the high interest rate that the borrower has to pay for on top of the principal loan amount.
This type of debt classification is done through the analysis of loan requirements.
Revolving vs Non-Revolving
Another way of classifying debts is by the looking at the payment methods. You can tell if a loan is a revolving or a non-revolving debt by how it is paid every month.
A revolving debt does not have a fixed amount of payment every month. The changes are based on the actual balance of the loan. A perfect example is a credit card debt. You could be paying more for this month than the previous one especially if you used your card for a purchase. The same is true for the computation of the interest rate. It is dependent on the total outstanding balance of the bill. This debt can also be used repeatedly without the need for a new application every time you decide to use it.
On the other hand, a non-revolving debt is a type of loan that has a fixed payment. Regardless of how high the interest rate index goes, your payment will remain the same. A perfect example is a mortgage loan. Unless you have taken a loan that involves balloon payment or something similar, your monthly amortization and the interest rate associated with it remains the same. Also, this type of debt can only be used once. If you need more financial aid, you need to apply for a new one and wait for approval.
A revolving debt is actually more dangerous than a non-revolving one because it has the more potential to grow. For instance, if a credit card user pays only for the minimum payment requirement while continually using the card could find themselves deep in debt. If you have a revolving debt, you need to pay for it in higher increments to get rid of the debt immediately.
A lot of people who find themselves deep in debt are those who have a lot of revolving debts. If this sounds like something that you are experiencing, NationalDebtRelief.com is here to help you. Give us a call through our toll free numbers or chat with us. We can help you find a solution to get out of your debt and achieve financial freedom. You can also fill up the short form on this page and we will have someone get in touch with you. Don’t worry about the initial consultation – it’s free!