Types of Debt Explained

One part of becoming debt free is understanding the various types of debt. Here is an explanation of the two primary kinds of debt.

Unsecured Debt

When we refer to your becoming a debt free woman, we are referencing freedom from unsecured debts. Unsecured debt refers to debts that are not tied to physical property, such as a home, car, boat, etc. The most common type of unsecured debt is credit card debt. With unsecured debt, creditors cannot seize any property from you if you fall behind on payments. Of course, they can take a number of other legal actions, but they cannot repossess physical property. Usually, when borrowers default on unsecured debt, the worst a creditor can do is get a judgment against you to garnish your wages. Debt consolidation services deal only with unsecured debt because creditors are much more accommodating when they don't have the option of seizing property. Here are some common types of unsecured debt:

• Credit card debt
• Personal loans that are not tied to a physical piece of property
• Student loans
• Medical bills
• Phone bills for which the line has been deactivated

Secured Debt

If you would like to become a debt free woman through debt consolidation, you cannot include secured debt in the consolidation process. Secured debt refers to loans that are tied to a physical piece of property. For example, a mortgage loan is a type of secured debt, as is an auto loan. With these kinds of loans, if you default on the payments, the bank can repossess the property that you offered as collateral, be it a house, a car, etc. This type of debt doesn't lend itself well to debt consolidation because lenders tend to be inflexible on interest rates and repayment when they can just take your home or car instead. Here are a few common types of secured debt:

• Mortgages
• Car loans
• Personal loans attached to collateral