what is debt and how to handle it
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5/1/2020 7:41:59 AM
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Credit
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 is among the most common — and most expensive — form of unsecured debt.
Americans’ total credit card debt reached an estimated $905 billion in 2017, according to NerdWallet’s annual American household credit card debt study. That’s up nearly 8% from the year before. And delinquencies are up, too, according to data from the Federal Reserve. This means consumers are carrying more debt, even as they’re having a harder time staying on top of payments.
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
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