Credit card debt, for example, is unsecured debt. With unsecured debt, there is no collateral. So, if you have a car loan and stop making your payments, the lender will take back your car and sell it to get their money back. In other words, there’s collateral. It’s a lower risk for lenders because they either get your money in payments or they take back what you “bought” and sell it. With secured debt, you’re borrowing money that’s backed by a physical item. What does that all mean? Let’s break down the types of debt and see.īy the way, we’re about to use lots of debt vocab, but we’ve got a handy glossary of debt terms defined if you ever need to pop down and look at it! Does the lender make you put up collateral (something they can take if you don’t pay)? Is the debt a one-time loan or an open line you can keep borrowing from? When we talk about types of debt, we’re talking about how the debt works. And if you didn’t know that-you learned two new things! All tortoises are turtles, but not all turtles are tortoises. It’s like how a tortoise is a kind of a turtle. All loans are debt, but not all debt comes in the form of a loan. What’s the difference between debt and a loan?īasically, a loan is a kind of debt. “Debt is a financial liability or obligation owed by one person, the debtor, to another, the creditor.” 1 In other words, debt is when someone borrows money (a debtor) and is responsible for paying back the person or company who loaned them that money (the creditor or lender). In simple terms, debt is owing any money to anybody for any reason. How? By breaking down what debt actually is and how it works (in words a real human can understand).įrom annoyed confusion to awesome clarity? Let’s do this. Well, let’s get some straightforward clarity. Heck, with so many opinions, it all gets confusing and honestly a little annoying. “What is debt?” You’ve probably heard a lot of different answers and examples and advice.
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