The two main types of debt are secured and unsecured debt. Secured and unsecured debts are created through either revolving or non-revolving lines of credit. Understanding the difference between these types of debt and lines of credit is extremely important for your financial well-being.
Unsecured Debts
Unsecured debts are not backed up by any tangible asset such as a house or car, according to the Federal Trade Commission. The most common types of unsecured debts include credit card charges, medical charges and signature loans. Unsecured debt is a major problem in the United States with close to $1 trillion of outstanding unsecured debt, according to the U.S. Census Bureau. If an individual defaults on an unsecured debt payment, it can drastically hurt their credit score.
Secured Debts
Secured debts are debts that are tied to an asset such as a house or a car, according to the Federal Trade Commission. Creditors can repossess a debtor's car or foreclose their home if the debtor stops making payments on either. The majority of auto financing agreements give creditors the right to repossess a car any time a debtor misses a payment and is in default. The finance company usually gives the debtor an opportunity to catch up, but it has the right to repossess the car without notice. For the debtor to get the car back after it's repossessed, he usually has to pay the outstanding balance on the loan along with towing and storage costs. If the debtor cannot pay these fees, the car is usually sold at auction. Mortgages are the next most common type of secured debt, but foreclosing a home usually takes a little longer and the length of foreclosure varies by state.
Revolving Credit
Revolving credit is the opposite of non-revolving credit. Credit cards are the most common example of revolving credit and provide borrowers with a repeatedly available line of credit. Once the balance on a credit card is paid down, the borrower still has the option to use his line of credit again. However, with a non-revolving line of credit, the borrower would not have the option to use her credit line again for additional purchases.
Non-Revolving Credit
Non-revolving credit is essentially an installment loan where the borrower has to pay a fixed monthly payment to the lender. The main difference between non-revolving and revolving credit is that once a borrower makes a payment on a non-revolving line of credit, additional credit is not extended to him. Student loans are a perfect example of non-revolving credit. The borrower provides the student with a certain amount of money and the student has to make fixed monthly payments. As the student makes monthly payments, the principal of the loan goes down. Unlike a credit card, credit is not "replenished." Once the principal is paid off, the agreement is over and the borrower no longer has a line of credit with the lender.
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