The most common debt by total amount of debt in the U.S. is mortgage debt. 2 Other types of common debt include credit card debt, auto loans, and student loans.
Here are the most common types of consumer debt: Credit cards. Personal loans. Mortgages.
The two most common examples of secured debt are mortgages and auto loans. This is so because their inherent structure creates collateral. If an individual defaults on their mortgage payments, the bank can seize their home. Similarly, if an individual defaults on their car loan, the lender can seize their car.
Unsecured debt is any debt that is not tied to an asset, like a home or automobile. This most commonly means credit card debt, but can also refer to items like personal loans and medical debt.
Here's a breakdown of the total debt amounts as of the fourth quarter of 2023 from the Fed data and average balances per debt type from the second quarter of 2023 from Experian data, the most up-to-date data available. Mortgage debt is most Americans' largest debt, exceeding other types by a wide margin.
Debt and Financial Obligations
Probably the simplest example of debt is a bank loan. A bank loans you money and you have to pay it back within a certain time, usually with interest. This loan is both a financial obligation and a debt.
Credit cards, personal loans and private student loans tend to have the highest interest rates, while mortgages and federal student loans tend to have the lowest.
Secured loans require some sort of collateral, such as a car, a home, or another valuable asset, that the lender can seize if the borrower defaults on the loan. Unsecured loans require no collateral but do require that the borrower be sufficiently creditworthy in the lender's eyes.
The main difference between secured and unsecured loans is collateral: A secured loan requires collateral, while an unsecured loan does not. Unsecured loans are the more common of the two types of personal loans, but interest rates can be higher since they're backed only by your creditworthiness.
In addition, "good" debt can be a loan used to finance something that will offer a good return on the investment. Examples of good debt may include: Your mortgage. You borrow money to pay for a home in hopes that by the time your mortgage is paid off, your home will be worth more.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
This could be in the form of a payday loan, credit card, personal loan, etc. In these situations, you spend most of your time, money, and effort paying off the interest and little or no money is going to the principle of the loan.
Financial setbacks made it difficult to achieve milestones
In addition to the plethora of financial challenges consumers faced this past year, 65% of Americans experienced financial setbacks in 2023.
Examples of secured debt include homes loans and car loans. The loan is secured by the car or home, which means that the person you owe the debt to can repossess the car or foreclose on the home if you fail to pay the debt.
Unsecured loans are a great financing option for people who don't want to offer up collateral, which is something of value a lender can repossess to recoup its losses if you default. However, the lender takes on more risk without collateral and typically charges higher interest rates to compensate for the added risk.
When an unsecured debt becomes secured. If you have an unsecured loan and a lender already has a court order in place to enforce payment, they can apply to the court to get a charging order over your property. This means the debt has become a secured one.
A debt security is an investment asset that involves a debt rather than ownership in a company. A common example is when a corporation or government agency issues a bond and sells it to investors.
Filing for personal bankruptcy usually won't erase child support, alimony, fines, taxes, and most student loan obligations, unless you can prove undue hardship.
Some examples include: Business Loans: Debt taken to expand a business by purchasing equipment, real estate, hiring more staff, etc. The expanded operations generate additional income that can cover the loan payments. Mortgages: Borrowed money used to purchase real estate that will generate rental income.
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
Paying off the debt on the card with the highest interest rate first is one method to reduce credit card debt. This is called the “debt avalanche method.” While some advocate for paying off your smallest debt first because it seems easier, you may save more on interest over time by chipping away at high-interest debt.