Different Types of Debt

Unsecured Credit and Secured Credit

Unsecured credit is credit which is given to you without securing it against an asset. Secured credit is where it is secured against a particular asset. For example if you have mortgage, then this is secured credit because if you continually do not make the payment on the loan then you could be reposed from your house to pay the debt. But a credit card is unsecured, because it is not linked to any particular asset like a house or car.

Unsecured Credit

Loans
This is usually the cheapest way of borrowing money and because you have to pay a certain amount of each month you know exactly when it will be all paid off.

Credit Cards
Credit Cards are an expensive way of borrowing, but are extremely convenient and versatile. Also if you pay your whole bill off each month then you never pay any interest what so ever. Watch out though many cards offer 0% introductory rates which then after 6 months or a year go up to much higher rates of interest, such as 17.5% apr.

Store Cards
Store cards are offered to you by chain stores such as Debenhams, BHS, Dixons and many others. They charge extortionate interest if you do not clear your balance each month and are the worst way to borrow money. Interest rates on these cards can be as high as 29% apr.

Overdrafts
Overdrafts are unsecured. They cost more then loans in interest, but less than most credit cards.

Also a bank can ask for their money back at anytime with an overdraft. It’s what they call, repayable on demand.

Catalogues
Many catalogues such as Littlewoods and Kays will let you pay for goods over a period of 20 weeks, 38 weeks or even longer. If you pay over a longer period of time than 38 weeks you usually pay interest which can be quite high.

Usually goods cost a little more from these catalogues than from a normal shop or mail order company.

Secured Credit

Secured Loans
Secured loans are against your property and if you take one out beware that if you do not make the payments your house is at risk of being repossessed.

Hire Purchase
Hire Purchase is where you are 50% buying the product and 50% hiring the product.

You are not allowed to sell the product until it is paid for. If you have paid for more than a third of it then the finance company will not be able to just repossess the product and will have to get a court order.

Student Loans
Student Loans are not covered by bankruptcy. So if you go bankrupt you will still be required to pay your student loan.

Mortgages
Mortgages are a secured loan on your house and if you fail to pay your mortgage you risk having your house repossessed.