Debt is complex, varied and wide-ranging.
You can find yourself in loads of different kinds of debt; from the small to the short-term to the crisis-level of debt.
Knowing which type of debt you have can be crucial in helping you to get out of it – so it’s important to understand the many categories of debt and how they are different.
They type of debt you have really depends on how you borrowed the money, how much, and where from. That all has an impact on how quickly you need to try to pay off your debts, and which ones you need to prioritise.
Unsecured debt
Let’s start with unsecured loans; loans where you agree to make regular repayments to the lender until the loan, as well as all interest, is fully repaid.
Non-payment of these kinds of loans can result in further fees and even court proceedings, so you need to keep on top of them.
Common unsecured debts include:
Catalogues
This is where you buy something from a catalogue and a payment plan is agreed.
Payments are made weekly until whatever you bought is paid for in full. The payment is usually a fixed sum credit agreement.
‘0 per cent offers can prove difficult and expensive if you don’t repay them on time,’ explains debt advisor Sara Williams.
‘The Buy Now Pay Later deals from catalogues turn into very expensive debt if they aren’t repaid in the set period.
‘And some of the new shopping facilities like Klarna may not even feel like debt, until you find you have bought more than you can afford to repay and the letters arrive from a debt collector.’
Personal loans
This is a loan made to a person rather than a company. The loan is offered with a fixed rate of interest built in at the beginning.
Payments are made monthly and are fixed over an agreed period of time. The interest rate on personal loans is usually pretty high.
Overdrafts
An overdraft is an agreement between you and your bank that allows you to spend an agreed upon amount of money more than you currently have in your account.
It might not feel like debt, but it definitely is.
Overdrafts often have a high level of interest on them and also there is usually a small charge to use your overdraft, or a big charge if you haven’t pre-agreed to the overdraft with your bank.
Store cards
Store cards are now available in most high street shops. Repayments are made on a monthly basis and have to be paid in full to avoid interest charges.
Guarantor loans
This is a type of unsecured loan that requires a guarantor to co-sign the credit agreement.
A guarantor is a person who agrees to repay the borrower’s debt should the borrower default on agreed repayments.
‘If you have bad credit, a guarantor loan may look cheaper than a payday loan, but if you get into financial difficulty, a guarantor loan can be incredibly stressful as you have to keep making the payments if you don’t want you guarantor to be affected,’ explains Sara.
‘I hope the regulator will introduce extra protection for guarantor loans to help borrowers and guarantors, but until that happens a guarantor loan can be dangerous.’
Credit cards
Credit card debt is one of the UK’s biggest debt problems. If you have credit card debts that remain unpaid for long enough, it can make it much harder to borrow in future because it can tank your credit score.
A common cause of credit card debt is using your credit card to withdraw cash – which can incur a fee and higher interest rate – or exceeding your credit limit.
‘When you are borrowing money, a loan has a fixed term and repayments, but credit cards, catalogues and overdrafts work differently,’ says Sara.
‘With these debts, you can keep borrowing more and the repayments are flexible; so long as you pay the minimum.
‘This flexibility can feel very useful, but you can end up trapped in debt for 15 or 20 years if you are only making the minimum repayments – so they can work out very expensive.’
Secured debt
Secured debts are secured by an asset – like a house or a car. So a mortgage is a secured debt. And if you don’t keep up with your repayments, the lender has the right to seize your property – which we don’t want.
‘Secured debts are a priority because you can lose your home (mortgage) or car (HP, PCP, leasing),’ explains Sara.
‘Other priority debts are those which have to be paid first because something bad can happen if it isn’t; losing your home (rent), having essential services cut off (gas, electricity) or getting sent to prison (council tax, magistrates court fines).
Sara explains that a secured loan will always be much cheaper than an unsecured loan because you are putting your house at risk.
‘If you lose your job or have your hours cut, you can make an arrangement to pay an unsecured loan at a lower rate, but a secured loan always has to be repaid in full,’ she adds.
‘Obviously, the interest rate matters.
‘All lenders have to quote an APR (annual percentage rate) for their debt to help you compare different products.
‘The better your credit record is the lower interest rate you can usually get – although if you have already borrowed a lot, there gets to a point where no-one will give you more debt at a cheap rate.’
Knowing which kind of debt you have is important when prioritising your repayments.
Priority debts mean that something bad will happen if you don’t pay it back – like losing your house or going to prison. So it’s always best to start with these debts first when looking at your monthly budget.
Mortgage repayments, council tax arrears, household bills and magistrate court fines should be top of your list.
Debt Month
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.
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source https://metro.co.uk/2019/11/07/all-the-different-kinds-of-debt-you-need-to-know-about-11043573/
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