FollowThere are 2 types of consumer debt. Unsecured and Secured. It is important to understand the difference between the two.
Secured
This is debt that if not paid the entity that loaned you the money can take possession of the product you purchased. A good example of this is a car loan. If you don’t pay your monthly payment they will come and take your car from you. It gets worse, if you owe more on the car that what it’s worth when they take it back the lender will get a judgment on you and you will have to pay the difference in the value of the car and what you owe. Ouch!!! As you start your working career you will have to pay income taxes. If you do not pay the IRS they can take all of your possessions to satisfy what you owe. This is not a big deal right now so don’t worry about it, just know that it’s important.
Most common types of secured debt are: Home loans
Car loans
Unsecured
This is debt that is not attached to a physical product purchase but just based on good faith that you will the loan back. Credit Card debt is unsecured. This means that if you pay $100 for a pair of shoes on your credit card and you don’t pay the bill no one will come after your shoes. However anytime you don’t pay back a loan your credit score will suffer dramatically and your access to new credit will also be dramatically reduced. A benefit of unsecured loans is that they can’t come and take what you bought with that loan and it is possible to have those debts removed completely in a chapter 7 bankruptcy. Watch out though because even though student loans are considered unsecured they are traditionally very difficult to remove in bankruptcy, mainly because student loans are typically backed by the government.
Most common types of unsecured debt are: Credit Cards
Bottom line is that when you are looking to take on any debt look at your exit strategy. How are you going to get out of that debt and what happens if you can’t.