What Are the Different Types of Debt?

If you’ve ever borrowed money to purchase a car, taken out a mortgage or used your credit card, then you’ve taken on debt. Debt is money you borrow from a lender and repay over time, typically with interest, which is the cost of borrowing. When you manage debt responsibly, it can open the door to opportunities like homeownership, car ownership and more.

There are four main types of consumer debt: secured, unsecured, revolving and installment. Each type of debt serves a different purpose. “Secured” and “unsecured” describe a condition under which credit is offered, while “revolving” and “installment” describe how money is made available to the borrower and repaid to the lender.

Most debts can be more than one type. For example, a mortgage is a secured installment loan, while a credit card is usually an unsecured form of revolving credit.

Let’s explore the four main types of consumer debt in more detail so that you can familiarize yourself with how they work, when you might encounter them and when they might benefit you.

Four common types of debt

Here’s a quick look at the four most common types of debt and their key differences:

Type of Debt	What Is It?	Common Examples	Common uses
Secured	Debt backed by collateral (something of value you possess) that the lender can claim if you don’t repay	Mortgage, auto loan, home equity loan	Home and auto purchases
Unsecured	Debt that is not backed by collateral and is extended based on creditworthiness	Credit card, personal loan, student loan	Large purchases, ongoing expenses, education
Revolving	A line of credit you can borrow from and repay repeatedly up to a set limit	Credit card, line of credit, home equity line of credit (HELOC)	Ongoing expenses, everyday spending
Installment	A lump sum repaid in fixed payments over a set period	Mortgage, auto loan, personal loan, student loan	Large purchases (including a home or car), education

Secured vs. unsecured debt

Secured debt is a loan that is backed by something of value that you possess, called collateral. If you don’t repay the debt as agreed, the lender has the right to take the collateral to recover their losses.

Unsecured debt doesn’t require any collateral. Instead, you qualify based solely on factors like your credit history, credit score and income.

Secured debt

Certain types of debt, like mortgages or auto loans, are always secured. When you borrow money to buy a home or car, that property becomes collateral for the loan. If you default, meaning you don’t repay the debt as agreed, the lender has the right to foreclose on the home or repossess the car.

Other types of debt, such as personal loans, may have secured and unsecured options. Some people choose a secured personal loan because it can help them improve their chances of qualifying, borrow more money or receive a lower interest rate than they might with an unsecured loan. If you’re considering a secured personal loan, keep in mind that there are often eligibility requirements for your collateral, such as the condition and age of your motor vehicle and proof of insurance.

A few common examples of secured debt include:

• Mortgage
• Home equity loan
• Home equity line of credit (HELOC)
• Secured personal loan
• Auto, boat or RV loan
• Secured credit card

Unsecured debt

People use unsecured debt to make everyday purchases, pay for education, fund emergency expenses or consolidate debt in order to get a little more breathing room in their budget.

Common types of unsecured debt include:

• Unsecured personal loan
• Credit card
• Medical bill
• Student loan

Revolving vs. installment debt

Revolving debt gives you access to funds through a line of credit, which means you can borrow up to a set limit, pay back what you owe over time and borrow again. As you repay your balance, your available credit increases to reflect the payment.

Installment debt involves borrowing a lump sum of money upfront. You then repay what you borrowed in fixed monthly payments, including interest, over a set period of time.

Revolving debt

Revolving debt may be particularly helpful if you need to cover ongoing expenses that may change month to month.

Examples include:

• Credit card
• HELOC
• Personal line of credit

With revolving debt, you typically aren’t required to repay the full balance every month. Instead, you only have to make the minimum monthly payment, which is usually a percentage of your outstanding balance. However, any amount you don’t repay will be charged interest and added to the next month’s statement. Your credit limit will also be lowered by the amount you still owe. Because of these limitations, it’s a good idea to repay as much of your balance as you can every month.

Repaying your balance in full each month may also be good for your credit profile. When you keep your balances low, you can lower your credit utilization ratio (the amount of your available credit that you’re actually using). Plus, making regular on-time payments could improve your credit score.

Installment debt

Installment debt offers a predictable repayment structure — typically one payment a month (or billing cycle) and a clear payoff date. Each payment includes a portion of the amount you borrowed, called the principal, plus interest. If your installment debt has a fixed interest rate, that payment may stay the same for the entire loan term as long as you make all your payments on time.

Common examples of installment debt include:

• Mortgage
• Auto loan
• Student loan
• Personal loan
• Debt consolidation loan

Having fixed payments and a set payoff date can make it easier to budget for repayment. In some cases, you may even be able to pay off an installment loan early by making extra payments toward the principal. There may be specific instructions you need to follow to make a principal payment, and there may be a prepayment penalty for paying off your loan early, so it’s a good idea to check with your lender first before sending any extra money.

---

---

Not all debt is created equal

Understanding the main types of consumer debt and when you might use them could help you find the best financial support for your goals. No matter which type of debt you take on, do your research, work with a reputable lender and read the fine print before you sign on the dotted line.

Sources

1 https://www.creditkarma.com/credit/i/what-is-a-delinquent-account
2 https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
3 https://www.nfcc.org/blog/which-debt-repayment-method-is-right-for-you/
4 https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-relief-program-and-how-do-i-know-if-i-should-use-one-en-1457/