The 5 Different Types of Consumer Debt
Different types of debts have various impacts on credit scores, tax implications, and payment plans. Sometimes consumers might need to have several types of debts on their credit report to demonstrate their ability to balance their finances. They should consult an insolvency practitioner like Hudson Weir Ltd. to explore their options. Consumers with a diverse credit history have a higher chance of qualifying for a loan.
Credit utilization is one of the factors that lenders use to calculate your credit score. It refers to debts that a consumer owes compared to the credit available to them. Here is consumer debt definition and a breakdown of the common types of consumer debts, their differences, and their impact on your finances. Consumer debt refers to personal debts owed after purchasing an item used for household or individual consumption.
Home loans are installment debts that consumers repay in a set of installments over an agreed-upon period. Mortgages are secured loans, meaning the acquired property serves as the collateral for the debt. Lenders have the right to begin the foreclosure process should a consumer stop making payments. The foreclosure process can include seizing the property and reselling it.
Interest rates on a home loan can range between 3% and 5% depending on the economic state. The interest rate for an adjustable home loan can change from year to year based on specific parameters.
Medical debts don’t come with an agreed-upon repayment period and aren’t secured by collateral. Instead, most healthcare providers and hospitals allow patients to set up a payment plan with their lenders if they can’t pay their full hospital bill right away.
However, that option depends on the hospital or doctor who is treating you. Some healthcare providers might require patients to pay their bill in full at the time of service, but that may be impossible for a patient who has had a costly and extended hospital stay. Patients are, however, allowed to negotiate a lower price with the hospital’s billing department.
Auto loans are like home loans in that they are secured installment debts. Auto loans can be repaid in a set of installments over an agreed-upon period. Lenders can repossess a car and resell it if a borrower defaults on the loan or stops making payment.
The longer the term of an auto loan, the lower the interest rate is likely to be. A longer loan term often means a lower monthly payment but more interest is paid overall. Individuals with an impressive credit score often qualify for low- or no-interest financing deals from auto dealers.
Credit Card Debt
Credit card debts are like a revolving account, and borrowers don’t have to repay it off at the end of a loan term. These loans are unsecured, meaning none of your assets, including cars and houses, will be tied to the loan. So, lenders can’t repossess your assets and cover the debt if you cannot make payments.
Credit card interest rates vary based on your credit history, credit score, and the type of card. Their interest rate tends to range between 10% and 25% depending on the economic state.
These are unsecured loans, and their repayment terms are more flexible than any other type of debt. The interest rate on these loans can vary across institutions. The US federal government sets the interest rate of student loans. Student loans are often the first debts most people take, and their interest is tax-deductible. As with other types of loans, repaying student loans on time can help build your credit score. Regardless of the type of loan you take, the most important thing is honoring the loan terms and making your payments on time. Timely payments can help build your credit score and avoid debt collectors.
These are just five of the most common debts consumers incur. If you feel unable to continue making payments on your debt, contact your lender to find out what options are available. They may allow you to defer payments for a few months until you are able to resume making payments. You also may be eligible for a debt consolidation loan to pay less interest.