Some of us grew up with the concept of debt being a terrible thing to get into, and for a long time, I was always scared of debt and tried everything possible to stay away from it as much as possible. However, when adulthood got into play, there were cases I couldn't avoid getting into one. There are some debt types that are very bad while others are not so bad after all. In this post, I want to share the different available types of debt and which is healthy or unhealthy for our finances.
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Secured Debt: This type of debt is a loan given with collateral, in this case, the borrower has to present an item he is willing to lose if he is unable to repay his debt, the collateral presented could either be in form of cash or property. At the point when the borrower is unable to pay back the loan at a given time, he would lose the collateral, this loan form usually offers lower interest rates as it is backed by collateral, and the risk to the lending party is highly reduced.
Unsecured Debt: This nature of debt is not backed by collateral, if the borrower fails to pay back the borrowed money, the lender has no property to seize or hold unto. While this is dangerous to the, it also comes with a high-interest rate for the borrower. In most cases, lenders give out loans based on the evaluation of the borrower's credit score, if the credit score isn't good enough then the loan may not be offered.
Revolving Debt: This is a clear arrangement between a lender and a borrower allowing the borrower to take up a specific amount of loan at a certain time on a constant basis, a good example of this is the credit card loan, in this case, the customer can spend up to a specific amount until he gets to a limit and once that is cleared, he can spend again the following month.
Mortgages: Mortgages are used for the acquisition of real estate, usually the property itself is the collateral in this case. Amongst other loan options, mortgages usually come with the lowest interest.
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Why people get into debt.
At some point as an individual, and as an organization, we need funds to handle certain parts of our lives and businesses, when we do not have sufficient of that amount of cash available, then we resolve to borrow money. We cannot deny that money opens up the door to several opportunities, without money to fund great ideas sometimes, the money is unproductive. Debts give us the chance to new, better, and greater opportunities.
Regardless of the possibilities that debt helps us to achieve, we must also consider the reason for taking the loans that we take and we should be careful enough to know that, w genuinely have the capacity to get them paid back, or we risk losing the valuables we have kept as collateral, or even prevent us from getting a more urgent loan in the future.