At its simplest, debt is defined as money owed by one party to another. But it can get complicated fast. Depending on your circumstances, debt can be a useful financial tool or baggage complicating your life.
The best way to handle your debt depends on what kind of debt you have and how much you owe. If you have too much debt, you may need to find debt relief. Just be wary of any company that over-promises or sounds too good to be true, such as debt forgiveness.
Below we break down the various forms of debt and how to handle them.
Secured vs. unsecured debt
There are two types of debt: secured and unsecured.
Secured debt means the borrower has pledged an asset as collateral for the loan. Auto loans and mortgages are common examples of secured debt. If you fail to repay as agreed, the creditor can seize the asset, for instance repossessing a car or foreclosing on a house.
Unsecured debt, on the other hand, is not backed by an asset. A common example is credit card debt. However, that doesn’t mean you get off scot-free if you fail to repay.
A credit card issuer, for instance, will likely sell your delinquent debt to a third-party debt collector, which may then hound you for payment. If you don’t pay the debt collector, it may sue you for payment, which can lead to wage garnishment. Some really aggressive original creditors may sue you directly, without using a collection agency.
Credit card debt
Credit card debt is among the most common — and most expensive — form of unsecured debt.
Americans' total credit card debt reached an estimated $416 billion in 2020, according to NerdWallet’s annual American household credit card debt study. Among people with revolving credit card debt, the average amount owed was $7,027.
Depending on your personal credit score, the annual percentage rates, or APRs, on your credit cards can be in the teens and 20s. Not paying off your full balance each month can get expensive, fast.
If you’re having trouble paying off your credit card debt, here are a few ways to handle it:
Consider a debt management plan from a nonprofit credit counseling agency.
If you have multiple debts, see if you can consolidate them.
Look into a 0% intro APR balance transfer credit card.
Talk with a bankruptcy attorney to explore your options.
Medical bill debt
Medical bill debt can come from a routine visit to your doctor, or from an unexpected event like a broken bone or hospitalization. This type of debt can be expensive and, further complicating matters, there's not a clear-cut way to handle it if you can’t afford to pay it off all at once.
Here are a few ways to pay off your medical bills:
Set up a payment plan.
Use a medical credit card.
Hire a medical bill advocate.
No matter how strapped you are for cash to pay your medical bills, avoid putting the medical bill on a credit card. Most medical providers don’t charge interest; moving that debt to a credit card wipes out that advantage and can make it more expensive.
If you graduated from college in the past few years with student loan debt, chances are you’re carrying a sizable balance. On average, U.S. households that had student debt in 2020 carried a balance of $56,572.
Student loans are either federal or private, with a variety of loan types between the two. Regardless of where the debt came from, you’ll likely be paying your student loans off for years to come.
You have a few ways to get help with student loan debt:
Call your student loan servicer to discuss relief options.
Sign up for an income-driven repayment plan.
Apply for forgiveness, if you qualify.
Be wary of any companies that promise full debt relief help — many are scams.
Personal loans can help consolidate credit card debt or provide cash flow for a specific reason, like a home remodel. Loan terms are generally two to five years, with interest rates that range from 5% to 36%.
If you’re having trouble paying back your personal loan:
Call the lender to see if you can defer payments or go on a hardship plan.
Consult the free help of a nonprofit credit counselor to better manage your budget.
Talk with a bankruptcy attorney if you’re facing too much debt.
Car loans are a form of secured debt, meaning that if you don’t pay, the lender can take back the car that serves as collateral. Car loans are growing longer and more expensive. This can make them harder to pay off, especially if your budget is tight.
Here’s how to handle an expensive car loan:
Refinance the loan.
Downsize your car for a less expensive one.
Find a way out of the loan.
Getting a mortgage is likely the biggest personal finance decision you’ll make. They generally last decades and cost hundreds of thousands of dollars. In 2020, the average American carried a mortgage balance of $190,595, according to NerdWallet’s debt study. A mortgage is a secured loan, meaning the bank can take your house if you don’t pay as agreed.
But you have some recourse if you’re having trouble paying your mortgage:
Consider refinancing your mortgage.
Take advantage of the Home Affordable Refinance Program.
Debt is often a necessary part of keeping a small business running. You can take out a loan or business line of credit to hire more employees or purchase new equipment.
But too much debt can put a crimp in your business cash flow and potentially put your business at risk.
If you’re facing steep debt, there are several ways you can get your business out of debt. They include:
Boosting your sales.
Refinancing or consolidating your high-interest business debt.
It's common to have an account in collections. About 28% of consumers with credit files do, according to a 2020 report from the Consumer Financial Protection Bureau.
Knowing how to handle a debt in collections can be tricky, though. Here are some steps to follow if you’re being hounded by debt collectors:
Brush up on your debt collection rights.
Don’t give in to pressure to make a quick payment.
Gather information on the debt.
Make a plan to handle the debt in collections — options include creating a payment plan, settling the debt or paying it in full.
» MORE: Understanding what debt is in Canada and the types of debt
As an expert in personal finance and debt management, I can provide valuable insights into the concepts discussed in the article. I have a deep understanding of various forms of debt and strategies to handle them effectively.
The article begins by defining debt as money owed by one party to another and highlights its complexity based on individual circumstances. It emphasizes that debt can be both a useful financial tool and a potential burden, depending on how it is managed. I'll break down the key concepts mentioned in the article:
Secured vs. Unsecured Debt:
- Secured debt involves pledging an asset as collateral for the loan, such as auto loans and mortgages.
- Unsecured debt is not backed by an asset, with credit card debt being a common example.
Credit Card Debt:
- It's highlighted as one of the most common and expensive forms of unsecured debt.
- The article mentions the average credit card debt in the U.S. and suggests ways to handle it, including debt management plans, consolidation, and balance transfer credit cards.
Medical Bill Debt:
- Discusses the challenges of handling medical bills, suggesting options like payment plans, medical credit cards, and hiring a medical bill advocate.
- Emphasizes avoiding putting medical bills on credit cards to maintain the advantage of not incurring interest.
- Addresses the prevalence of student loan debt and provides strategies for managing it, such as contacting loan servicers, exploring income-driven repayment plans, and applying for forgiveness.
- Warns against scams related to companies promising full debt relief.
- Highlights the role of personal loans in consolidating debt or addressing specific financial needs.
- Provides advice on dealing with personal loan challenges, including deferring payments, seeking help from credit counselors, and consulting with bankruptcy attorneys.
- Describes car loans as a form of secured debt with potential collateral consequences.
- Offers solutions for handling expensive car loans, such as refinancing, downsizing, or finding a way out.
- Acknowledges mortgages as a significant financial decision, emphasizing their long-term and substantial nature.
- Suggests options for managing mortgage difficulties, including refinancing and utilizing programs like the Home Affordable Refinance Program.
- Discusses the role of debt in small businesses, emphasizing the need for balance and caution.
- Provides strategies for managing business debt, such as boosting sales and refinancing.
- Recognizes the common occurrence of accounts in collections.
- Advises on how to handle debt in collections, including understanding rights, resisting pressure, gathering information, and creating a plan.
Understanding these concepts is crucial for making informed decisions about managing various types of debt effectively. If you have specific questions or need further guidance on any of these topics, feel free to ask.