Types of Debt – Good, the Bad and Ugly
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‘Debt’ and ‘debt collector’ are two terms that don’t exactly conjure up cheerful images. No-one wants to be in debt, and no one wants to have to deal with a debt collector. Sometimes, it can happen that we forget a payment, and we find ourselves in that situation.
Unfortunately, in these modern times, debts and debt collection are almost impossible to escape. Over half the adult population in the UK owes some type of debt, and the average household debt is at about £30,000. With debt clearly being such a massive problem, we’ll take a look at the types of debt there are.
The two main types
When you borrow money, you can fall into either secured or unsecured debt. These are the two ‘umbrella’ types of debt that rule the roost. We’ll take a look at what each one entails.
Secured debt usually stems from a loan that you borrow against a physical asset, such as your house. Mortgages are the prime example of these types of debt. In short, if you get a mortgage, then the bank effectively owns part of your home until you’ve paid it off. If you can’t pay it off, the bank could repossess your home. The same goes for secured car loans as well.
These are loans that are not borrowed against any sort of physical asset. These make them much riskier for lenders as if you can’t pay back what you owe, they have nothing to claim. This is why unsecured debts have much higher rates of interest. If you can’t pay back the debt, the creditor doesn’t have anything to repossess, but could cause you other problems down the line.
The main types of debt
The main take-away from this is that if you can’t pay back what you owe, your credit rating will end up being affected. A bad credit rating will make it more expensive and harder for you to borrow money down the line, as well as affecting your ability to rent a property or enter into anything that might require you to have a credit check.
We’ll take a look at some of the other types of debt you can find yourself grappling with.
Business debts often involve HMRC, and could involve income tax (PAYE), national insurance, or VAT arrears. These types of debt are classed as priority debts, which means you should deal with them as soon as possible.
Utility bill debt
These types of debt are also priority debts because if you miss your agreed payments, you could fall into arrears and you may even get your supply cut off permanently. Gas and electricity fall under this type of debt, as water companies don’t have the same sort of powers.
Taking out loans or credits in a joint name or a joint account will affect both people involved. These types of debt can involve loans, credit agreements and bank accounts. You’ll both be liable for the full debt at the end of the day.
When you sign up for things like the gym, or a phone package, you’ll enter into a contract. If you fall behind with your payments, you will probably lose the service you had been contracted to pay for and end up in contract debt.
Council tax, child maintenance, benefit overpayments and tax debts to HMRC are all debts that you owe to governmental departments or local authorities. These are also priority debts, as falling behind on them could have serious consequences.
Consumer credit debt
These are debts that are regulated by the Consumer Credit Act 1974. Lots of debts are known as consumer credit debt, and include the following types of debt:
- Overdraft debt
- Store finance debt
- Personal loan debt
- Short term loan debt
- Store card debt
- Catalogue debts
- Hire purchase debts
- Logbook loan debt
- Doorstep loan debt
- Weekly payment store debt
- Car finance debt
- Insurance debts
- Credit card debt
- Guarantor loan debt
- Buy now, pay later debt
So a fair few, as you can see! The Consumer Credit Act 1974 covers your rights when you borrow money, the actions creditors can take if you fall behind with payments, and safeguards to protect you from unfair lending.
Payday loan debt
Payday loans are rarely the answer to your debt problems. They’re short term and they will have significant interest. Think carefully about payday loans as this type of debt is a really tricky one to manoeuvre.
These types of debt cover mortgages and renting in particular, and the threat of repossession is very real. These types of debt are worth trying to avoid if you can, so make sure you’re up to date on your payments.
Fines and debts put in place by the court are also very important types of debt to keep on top of. They should also be treated as priority debts because the consequences of not paying them could result in jail time.
Student loan debt
Nearly anyone who has gone to university will have taken out a student loan. These types of debt won’t seem like too much of an issue while you are studying, but when it comes to paying them back, it can become problematic.
Debt that you owe to other people
Borrowing money from friends and family is often a cheaper and easier way of borrowing. For starters, you may not have to deal with all sorts of charges and interest. That being said, you should always consider whether you can pay the debt, and consider the consequences this might have on your relationship.
This is by no means an exhaustive list of all the types of debt, but these are certainly the types of debt that you’re most likely to encounter. You’ll see that we’ve spoken about ‘priority debt’ a couple of times. This itself isn’t a type of debt, but it is something worth considering when you’re dealing with your debts. Make sure you check to see what your debt is involving, and see which type of debt it falls under.