Despite the generally negative connotation of debt, there are important benefits to carrying debt and eventually paying it off. Perhaps most obviously, taking on debt and making monthly payments in full helps you build good credit, allowing you to secure the best interest rates and/or highest limits on future credit cards, loan applications, car purchases, and home mortgages. A good credit score can also help you secure coveted apartment rentals and lead to other financial opportunities.
Of course, there are different types of debt that exist and each carries its own risks, benefits, and advantages. The four most common categories of debt include:
As its name would suggest, a secured debt is a debt that is tied (or secured) to a particular item, purchase or piece of property. You borrow money to cover the cost of the purchase, and if for some reason you cannot make payments, your lender retains the rights to the item in question and can even repossess and resell it. Typically, in order to qualify for a secured loan, you must meet certain requirements on a credit check (or have a qualified co-signer). You’ll pay interest on a secured loan; however, the rates are typically fairly low, depending on your credit score and the value of your purchase. The most common secured debts are tied to home ownership (mortgages, home equity loans, home equity lines of credit, mortgage refinancing, etc.) or to vehicle purchases (car loan, boat loan etc.).
Unsecured debts are not tied to any physical item that can be repossessed in the event of a failure to pay. This means that the risk is much higher for lenders, because they could end up having to sue the borrower to obtain what they are owed, or worse, take a loss entirely. Due to the elevated risk, even with an excellent credit score, you’ll likely end up paying higher interest rates on unsecured loans. Common types of unsecured debt include credit cards, personal loans, debt consolidation products, and signature/character loans.
Revolving debts can be secured or unsecured. What sets them apart is that they allow the borrower to borrow up to a certain limit or maximum amount every billing cycle rather than borrowing a single initial sum and then paying it off gradually over a set amount of time. Additionally, monthly payments for a revolving debt are not fixed, but depend on the amount borrowed in a particular billing cycle. An example of a secured revolving debt is a home equity line of credit; an example of an unsecured revolving debt is a credit card.
Mortgage loans are the most common types of secured debt. For most people, a home is the biggest purchase they will make and the largest debt they will carry. Because it’s such a large loan, home buyers typically receive very low interest rates and long payoff terms (generally 15-30 years).
Contact a financial law attorney in the Bronx to learn more about debt and your legal rights
Whether you are dealing with unmanageable debt payments, are looking to consolidate debt, or face debt-related litigation against you, you need a Bronx bankruptcy lawyer who understands how to help and guide you through your options. With more than 30 years in practice, attorney Thomas M. Denaro, Esq. offers unparalleled support and knowledge. To schedule a consultation today, contact the law firm online or call (718) 863-6000.