The topic of debt can be rather broad because it includes many different types of indebtedness, requiring a specific solution for each one. This article will list the major types of debts in economics and then explain the most common types of debt with their examples in society. The list is extensive but all kinds of debt can broadly be classified under two major groups: secured and unsecured debts.
Table of Contents
List of Different Types of Debt
- Secured debt
- Unsecured debt
- Consolidated loan
- Asset-based lending
- Interest-bearing loan
- Non-interest-bearing loan
- Term loan
- Short term loans
- Long-term loans
- Revolving credit line
- Bad debt
- Good debt
- Installment loan
- Car loan
- Home equity line of credit
- Student loan
- Business debt
- Corporate debt
- Foreign aid loan
- Mortgage loan
- Fixed income investment
- Recourse loans
- Non-recourse loans
This is a kind of debt whereby the borrower pledges some asset (known as collateral) to secure repayment. When a company needs to take on debt, it can do so through “secured Debt” by putting an asset as collateral. This means that the borrower pays back their loan with interest and then repays the amount of money originally invested by the lending company if the contract agrees upon this at signing.
If for whatever reason, during repayment, there are problems making payments, either part or all of the assets are given over to the lender until full payment has been completed. Secured Debt may be offered in less risky situations than unsecured Debt which does not use collateral. The expected rate of return between both types tends to be similar; however, it is likely that secured debt will offer a lower-risk option.
Unsecured debt is a kind of loan that isn’t backed by an asset. In other words, if you were to fail to pay back the debt, the creditor would have no way of recuperating any money from you. This is different from secured debt, in which case there is some kind of asset available for recovery in cases where repayment doesn’t take place.
Most unsecured debt tends to have higher interest rates than secured debt because creditors take on more risk when they’re not getting anything if the borrower fails to repay. This is particularly true in the case of unsecured credit cards, where annual percentage rates (APR) can range from 12-30%. This relatively high rate is partly because unsecured debts are smaller in size compared with larger loans like mortgages.
Examples of unsecured kinds of debts
- Payday loans
- Pawn loans
- Credit cards debt
- Signature loans
- Personal lines of credit
- Personal loans
There are many other types of unsecured personal financing.
These are short-term, high-interest loans typically for $500 or less. These types of debts are meant to be paid back in full within two weeks. Because of these facts, many consumers who take out payday loans end up having to renew them multiple times before they can pay the money back. This often leads to more debt for these individuals, which can result in them living paycheck-to-paycheck indefinitely.
Payday loans were first introduced in the early 1990s by an American economist named Russell Roberts as a way to help consumers with poor credit, little savings, and who live paycheck to paycheck access credit when no banks are willing to provide them with a loan.
In North America, a pawn loan is a cash advance that is lent to the public for collateral. A pawn shop offers loans on individual items of value by allowing customers to keep their belongings in the store. Pawn companies require items to be at least six months old in order to ensure that they are worth enough money for them to lend money against. This age limit varies from company to company and state to state (and country to country). The customer pays an interest rate fee known as “the vig” for this service; because of its nature as high-risk lending, it has very high-interest rates. Most lenders are financial institutions like banks or credit unions, but it could also be your friends or family. Pawnshops will not report missed payments to any sort of consumer reporting agencies like Equifax or TransUnion
Credit card debt
This is a form of revolving credit in which a borrower can borrow within a predetermined amount and repay all at once. The lender issues a small plastic card known as a credit card to the borrower who can use it as a system of payment. The credit card provides the holder with a line of credit by allowing him or her to borrow money up to an assigned amount (in some cases, possibly even without limit). The issuer of the line of credit charges interest on this loan, which must be paid at regular intervals; this is how it makes its profit.
A signature loan is a type of unsecured loan that can be useful to either a large or small business in order to allow them to purchase new equipment or real estate. It offers a quick approval process with a fast closing time and lower interest rates compared to other alternative forms of funding available in the market.
Because they are unsecured, they have high rates of return when it comes to investments. Since one cannot pledge any personal assets for these loans, lenders only recover the debt from the company’s revenue stream if it defaults on its repayment.
Signature loans typically require very little documentation when applying for one with a lender, but there are fees involved in preparation and processing.
Personal lines of credit
A personal line of credit (PLC) is an arrangement between an individual and their financial institution that lets them draw on the line when they need funds. These non-revolving, short-term loans can be used when cash is needed. They are mainly used in the case of emergency health care services or for paying off high interest rates on cards with a higher balance
Typically, personal lines of credit have variable monthly payments and an annual percentage rate (APR) around 20 to 30%. These loans also have a payoff period between 12-24 months.
A personal loan is a type of debt that allows individuals to receive large amounts of money without involving their family members as co-signers on the loan. The loan can be used for any purpose, whether it’s for car repairs, home improvements, consolidating debt, etc. The borrower must repay the amount plus interest by a set date. If they fail to do so then the lender may choose to pursue legal action against them.
This is a combined group of loans that have been rolled into a single loan that is easier to pay; it is often used when lower monthly payments are desired on certain debts such as credit cards debt or auto loans. Learn more on Debt consolidation.
This is a lending practice in which there is no contract between the bank and the borrower. Instead, the loan is based on assets owned by the borrower.
Interest bearing debt
An interest-bearing loan is a type of debt that may include any type of money or property borrowed by one party (the borrower) from another (the lender) with an agreement that the borrower repay the amount borrowed along with some extra money (known as interest) during a fixed term. Therefore, any kind of debt with interest to be paid can be termed as interest-bearing.
This refers to money or property borrowed by one party from another with an agreement that the borrower repay the amount borrowed but without requiring interest.
A term loan is a type of credit that allows an individual or organization to receive money from a financial institution over a set period of time. A bank, credit union, or the borrower themselves can offer this type of borrowing. As an example, an individual may receive a two-year term loan and repay the amount borrowed plus interest in regular monthly payments over the course of two years.
When compared to other types of credit, such as lines of credit and mortgages, term loans tend to be less complicated and therefore require less paperwork at the onset. The terms for repayment are also relatively standardized, which means that borrowers often know exactly what their payments will be long before they take on new debt.
A short-term loan is a loan that is paid back to the creditor within a year and a day. It always has a fixed repayment date lasting less than a year and interest rates can be as high as those for other forms of credit card debt, including compound interest which accumulates if the loan isn’t repaid on time.
An excellent example of short-term loans is a payday loan. A payday loan is typically offered by an individual or company such as Cash Converters (a popular UK-based pawnbroker) and unlike personal loans, it can be issued very quickly without much paperwork required, because all information needed to make the decision to issue the loan resides in your bank account details such as employment status, salary, and regular outgoings.
Long-term loans are loans that are structured to take place over a long period of time. They tend to be taken out for large financial needs, such as the purchase of an automobile or home. They are generally repaid monthly in regular installments.
Long-term loans are usually better options than overdrafts or credit cards for meeting short-term financial needs because they generally have lower interest rates and fees associated with them compared to other types of credit. However, there can also be risks associated with borrowing money over the long term, since repayment will generally occur on a monthly basis without any possibility of changing terms throughout the course of the loan agreement.
Revolving line of credit
This type of debt is also known as open-end credit; is a type of unsecured personal loan that can be taken out by an individual or business. The consumer has the possibility to borrow money whenever they need it and to pay it back with monthly payments which do not have a fixed monthly repayment.
The most common example of revolving debt is a credit card from a bank or lender. There is no fixed repayment schedule and the individual can borrow money whenever they need it and pay it back over time with monthly repayments.
Bad debt is simply any kind of debt in which the amount of money owed to another party cannot be collected.
Good debt is simply any type of debt that is paid back with interest. A loan taken to finance a house, business, or education is called good debt because the borrower expects the investment to increase in value and thereby repay the loan with interest. Good debts generate wealth.
Installment loans are types of loans that are paid back in multiple payments; they are forms of long-term loans that require regularly scheduled payments and have an end date. Installment loans are given for many different types of purchases, such as homes, cars, computers, or even furniture. These loans can also be used to pay off other types of debt.
Who offers installment loans?
There are several national lenders who offer installment loans on specific items. Many regional banks and credit unions also offer installment loan options for borrowers with good credit histories.
Some states have laws that limit the terms under which an installment loan can be issued by certain financial institutions, while some states leave it up to the decision of each lender. For example, Texas has very few limits placed on the interest rates that money lenders can charge, while in Massachusetts there are strict limits on interest rates. Each state’s legislature determines these limitations.
A car loan is also known as an auto loan, and it is a type of vehicle finance agreement, in which an individual borrows money from a bank or financial company to buy a car. The borrower will often be responsible for making regular payments until the amount owed becomes equal to the selling price, and then the title of the car is passed over to them.
Car loans are available on both new and used cars, but it may be more difficult to get approved for financing if you’re looking at used cars.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a type of revolving line of credit that allows homeowners to withdraw cash from their account at any time. It is a type of debt that allows homeowners to borrow against the equity in their homes at any time. This acts as a second mortgage on the property and the main advantage is that consumers have access to cash whenever they need it. There’s no restriction placed on how much can be withdrawn, so people have the option to get more money if they’re in an emergency situation or face unexpected expenses.
A student loan is a type of debt that requires repayment with interest after the recipient graduates from college or university. Most loans are taken out by students to pay for post-secondary education such as trade school, university, community college, and other specialized training programs (including medical school).
Student loans allow and encourage students and their families to invest in higher education without risking financial hardship if educational goals cannot be achieved.
The majority of borrowers eventually repay their debts; however, they do so over a long period of time. With student loans also comes deferment which means you can ask your lender whether you qualify for a temporary suspension on payments while your study allowance covers living costs like rent or groceries.
A business debt is a loan borrowed by small businesses in order to finance the operations of the company. The loan is usually structured around the revenue of the company, the amount to be borrowed is estimated based on the earnings or revenue of the business. Business loans are typically considered riskier by lenders due to their high ratio of unsecured lending in relation to loan size. Depending on the source, these debts can also come in many different forms with different repayment requirements and time frames.
Common sources of business debts can be credit cards, lines of credit, bank loans, and financing from friends, family or investors; these sources are often referred to as “soft” credits because they don’t require specific collateral to secure them.
Business debt is different from corporate debt in that corporate debt is most commonly associated with large-scale companies that have significant assets available for borrowing against these assets when the corporation needs capital while business debt is borrowed against the revenue.
Corporate debt, also known as “corporate bond” is the debt issued by corporations to investors. Those investors can be financial institutions like banks or pension funds (financial assets), or individuals (direct finance).
A corporate bond is a debt issued by business corporations through financial markets (debt capital market). Bondholders are creditors; they lend money to the corporation and receive a promise of future repayment with an agreed-upon interest rate.
Professional investors, such as banks and other financial institutions, who provide money for these bonds are considered creditors too. They make a profit from receiving a higher interest rate than they would from lending that money out to individuals or companies. The business issuing the bond is called the debtor or borrower.
The interest rates on corporate bonds are usually higher than those of government loans because they are seen as riskier investments. When companies issue debt, it does not necessarily mean that they are in trouble financially; sometimes companies use this approach to raise cash for new projects. However, if the company issues too much debt then it may be unable to pay its creditors and a default could occur which would cause bankruptcy. This happened with Lehman Brothers in 2008 when it filed for bankruptcy protection after suffering from low share prices, bad investments and exposure to subprime mortgages.
Similarly, high debt levels may increase the probability of bankruptcy. For example, according to Forbes magazine in February 2015, American Airlines had $12 billion of long-term debt with nearly $2 billion in annual interest expenses which limited its ability to invest for growth or give back money to its shareholders. If American Airlines had lower debt it might have been more profitable and able to pay its creditors more easily. It also would have paid less interest on its debts so it could use that money elsewhere like an improved fleet or better services for customers.
Bonds are certain types of loans that an entity makes to another, or that another entity receives from the first. The loans are usually for very large amounts and as such require a formal legal contract. Bonds can be made, for example, by governments; companies; individuals; and other entities both public and private. Depending on the type of bond involved, interest is either paid semi-annually or annually on the amount borrowed until maturity (the date when you must pay back the loan in full).
Foreign aid loan
Foreign aid loan is a means to provide a nation in need with a financial loan from a country that has sufficient funds. This is then used in order to facilitate recovery or development within the nation that is in need. The benefit of this for the recipient nation is that it can then use these funds to further itself and become economically stable. The benefits of providing foreign aid loans are increased by the fact that it also provides international trade opportunities; allowing countries that receive loans to buy goods and services from other countries while citizens of donor nations broaden their economic influence by importing goods and services.
A mortgage loan is a contract between the buyer and the lender to allow the buyer of a property to use it as collateral for a loan. In this way, they can get money from a bank or other lending institution in order to buy property, but will not own it fully until they have repaid their debts. This type of lending is often very useful for purchasing an expensive piece of property since it allows people with few assets of their own to gain all the advantages of homeownership.
The details involved in a standard mortgage loan are fairly simple: A person wishing to buy a house makes an arrangement with one or more banks that grants them temporary ownership while making repayments on an agreed schedule. The terms of these agreements hinge on two variables: interest rates and the length of time over which the loan is repaid.
Advantages of a mortgage loan
- The main advantage to a mortgage loan is that it allows people to buy property without having to pay for it all at once.
- The buyer gets a better interest rate on their loan if they have a good credit rating due to previous financial actions.
- There is an option for the buyer to take out a line of credit so that they can borrow money from it before their repayments are due
- The lender cannot repossess the property if the borrower is unable to make payments
Fixed income investment
Fixed income investments are debt securities that have a fixed coupon rate and a maturity date. They can be obtained on the money market or through more complex financial products such as Fixed Income Funds, Fixed Income Indexes, etc…
Firms wanting to benefit from these funds invest their surplus cash in them following a specific investment strategy developed by an expert asset management company. In addition to interest, they will also receive from the issuer of the bond the face value of each security at its maturity date.
A recourse loan is a type of loan in which the lender can request or demand that the borrower repay all or some of the outstanding balance if any collateral backing the loan decreases in value after being used as security during the life of the account. In many cases, this will also mean that borrowers are required to cover losses resulting from defaulting on payments on a recourse loan.
Recourse loans have become less common in non-real estate markets over time, but remain quite popular with lenders working in real estate areas.
In a typical recourse agreement, a lender lends funds to a borrower and obtains collateral for this cash advance. The cash advance acts as a credit limit while the collateral acts as insurance on debt repayment capacity of the borrower.
A non-recourse loan is a type of loan where the lender has no right to demand or seek repayment from a borrower should this borrower default on payments. In other words, the only assets available for lenders to receive money back in a non-recourse loan would be collateral attached to the account.
This type of debt requires that borrowers provide collateral that is sufficient enough to cover all outstanding debts, and many lenders require borrowers of non-recourse loans to have credit scores as high as 720 before qualifying for such an agreement.
A typical example where a non-recourse loan is used by real estate companies is when accepting deposits from customers who buy real estate with the intention of renting it out.
The most common types of non-recourse loans are those offered by banks, where repayment is only required if the borrower defaults on payments or violates the lender’s rules (e.g. failing to provide receipts). Most investors who hold non-recourse loans prioritize interest payments over the loan balance itself, which means that lenders often prefer these agreements for their flexibility and high profitability.
Nonrecourse loans are generally easier to qualify for than other forms of financing due to the soft credit requirements involved in this specific form of agreement for real-estate investments.
Which type of debt is most often secured?
The most secured type of debt is a mortgage. A mortgage is the type of debt that is most often secured because typically, you do not default on it and it can be taken away from you by the lender if you do. This means the bank can take your house to get their money back. It makes sure that everyone who owes something has a way to pay it back or else they lose everything they have built up which would be horrible for them as well as other people in a society whose lives are affected by an economy.
What types of debt cannot be discharged bankruptcy?
In United States bankruptcy law, there are a number of types of debt that cannot be discharged in a Chapter 7 or a Chapter 13 filing. The following debts and obligations must be paid back: alimony/child support, student loans, preference payment, property taxes (you will get to keep your house but must continue paying property taxes), criminal restitution, court costs and fines.
In the case of alimony or child support arrearages, it is possible for this type of obligation to be discharged by operation of a federal statute (11 U.S.C. § 523(a)(5)) but states have been slow to exercise the option provided within the Bankruptcy Code to release these debts from dischargeability in cases in which they were not already excepted under the law (most state laws generally continue to provide that alimony and child support obligations are not dischargeable).
Student loans, which millions of Americans struggle with, will often prove a major obstacle to filing a bankruptcy petition. Student loans from private lenders can be discharged by means of an adversary proceeding but only in very rare cases. The case for the discharge has to show that repayment would cause an undue hardship on the debtor and/or his dependents. This is something that is difficult to show under any circumstance. In fact, most courts have held student loan debtors must also demonstrate “good faith” efforts at repaying their student loan debt before it will be deemed dischargeable through the bankruptcy process.
What types of debt does bankruptcy eliminate?
The following types of debts can be discharged in bankruptcy under certain conditions: medical bills, lines of credit, credit card, utility bills, student loans, car payments, business debts, etc.