While often given negative connotations, debt is something that allows us to make larger, necessary purchases. Debt allows us to purchase a house to live in, a car for commuting to work, and obtain money for investing in a business. With the freedom that debt gives us to make those larger purchases, it becomes easy to lose control of how much we’re using debt. For those that would like to know how to pay off their debt, here are the types of debt and three steps for paying off debt fast.
The Two Types of Debt: Secured Debt and Unsecured Debt
How much debt you are carrying and how you manage that debt defines how that debt will influence your life. Understanding how to handle your debt and what your debt is composed of is an essential part of planning a strategy for paying off debt fast. Consumers must understand the kinds of debt and how they work. The two types of debt that consumers will encounter are secured and unsecured debt.
What is a Secured Debt?
Secured debt is a loan that a borrower has pledged an asset as collateral for. If the borrower fails to meet the terms of the loan, the lender may seize the asset. Some examples of secured debt include car loans and mortgages. Borrowers who default on a secured debt run the risk of having their car or home repossessed and sold to recoup the money lost.
What is Unsecured Debt?
Debt that does not require any collateral to secure the loan is unsecured debt. A prominent example of unsecured debt is credit card debt. Unsecured debt is based on the consumer’s ability to repay as well as their credit rating. Some other examples of unsecured debt include medical bills and utility bills such as water and electricity.
If a borrower defaults on an unsecured debt, they may be turned over to a collections agency or sued by the lender. Generally, delinquent accounts are reported to the three major credit bureaus. Borrowers who default on unsecured debts may risk having their credit scores be negatively impacted.
Three Steps for Paying Off Debt Fast
If you’re struggling with handling your household debt, it’s time to contemplate a strategy for paying off your debt. While some tactics for paying off debt such as not using credit cards and living within your means are generally known, individuals with severe levels of household debt may want to know how to pay their debt off faster. Here are three steps for paying off debt fast:
- Pay the Highest Interest Debts First:
With regard to debt, compounding interest may be a borrower’s worst enemy. Compounding interest is interest on interest. Previously accrued interest becomes part of the principal balance, which is then charged interest. Compounding interest on a high-interest loan may make paying off debt seemingly impossible. The presence of compounding interest makes it crucial for borrowers to pay debts with higher interest rates first. This may make paying off debt simpler as the balance of the loan is not increasing due to compounding interest being charged daily.
- Pay Down Your Balances Using Windfalls:
Financial windfalls come in many forms. A performance bonus at work, a raise, or even a tax return are some examples of unexpected bonus money. Still, it’s easy to take that money and splurge on something you’ve had your eye on. That way of thinking is dangerous for someone already trying to pay down debt. Instead of spending the money, use it to pay down the balances on your loans.
- Consolidate Your Debt Using a Personal Loan:
A personal loan is a great way for people with large amounts of debt to pay that debt off faster. With a debt consolidation loan, borrowers may use the proceeds to pay off multiple loan balances. This loan may include a single monthly payment at a fixed rate, making it easier to manage multiple loan balances with higher interest rates and compounding interest.