Understanding Bad Debt, Unsecured Debt and Consolidation Loans

From corporations to everyday individuals, debt has become a part of life. In fact,4 out of 5 individuals have mountains of bad debt, unsecured debt and consolidation loans of some sort. In this article, I will explain these types of financial vehicles so that you have a better understanding of this process. Hopefully by doing this, you will learn some new information that you didn’t know before.

1. Bad Debt is bad news. It is generally unsecured debt that doesn’t improve in value. For instance, a new or used car would be considered bad debt because it actually decreases in value from the time you buy it. It doesn’t add value and is a depreciating asset. In addition, a credit card would also be considered bad debt because the items you purchased with the card are also unsecured and don’t increase in value. With a credit card, you are basically paying for depreciating goods today that you purchased a while ago. In return, you are being charged an exorbitant amount of interest simply for the pleasure of borrowing money. In contrast, good debt would be a mortgage on a home that goes up in value. With this type of debt, your asset increases. Another example of good debt would be a student loan that leads to a degree that you actually use. For instance, let’s say that you are a law student and when you graduate, you secure a top position with a large firm. Due to your law school loan investment, you have added value to your life and can now have a better paying opportunity and higher income.

2. Unsecured debt requires no collateral. With this type of debt, you have not put up any collateral and the lender has not attached to anything. For instance, a credit card is an unsecured debt whereas an automobile is a secured debt. That is, with a credit card, the lender loans you the money without putting a lien on anything. In comparison, an automobile loan is a secured debt. With this one, you put the car as collateral. Therefore, if you don’t pay your bill, the lender can sell your automobile to collect the unpaid balance.

3. Understand consolidation loans. Consolidation loans are when you pay off existing lenders with a loan from another lender. In return, you typically receive more favorable terms (lower interest rates and smaller monthly payments). With a consolidation loan however, you must be careful not to charge up additional credit cards or you could very well find yourself owing even more money than you did previously.

Well, that’s it. You should now have a better understanding of bad debt, unsecured debt and consolidation loans. If you choose one of these vehicles, make sure that you understand what you’re getting, negotiate for the best terms and choose a reputable lender. By doing this, you will be well ahead of  the game. Good luck and happy lending!