Turbo Takeaways
- Debt is a typical part of financial life in America, making services and items attainable for most consumers.
- When properly managed, debt becomes a tool to make necessary purchases.
- Debt becomes a problem when consumers owe more than they can repay, based on income and unexpected life events.
What Is Considered Debt?
Simply put, debt is anything that one party owes to another and agrees to pay back over time. Whether it’s a student loan, mortgage, or car loan, debt is something that most consumers will manage at some point in their lives.
Debt is an essential driver of the modern financial ecosystem. When paid on time and consistently, monetary debt is an effective tool for making essential purchases and accessing important services. For example, most students take out a loan to pay college tuition, just as most homeowners take on mortgage debt to provide housing for their families.
The best approach to dealing with debt is to stay prepared and be aware of its implications. Keep reading to learn about the different types of debt and how you can get relief if you’re unable to repay what you owe.
Debtor vs. Creditor
The party that loans money is called ‘the creditor,’ while the party that receives the money and owes the debt is called ‘the debtor.’ The terms and conditions for debt repayment between a debtor and a creditor are prearranged and completed with a legal contract.
Creditors use debt as an investment opportunity and usually charge interest to make a profit from lending money. Conversely, debtors use debt to fulfill their immediate financial needs and repay the principal amount with interest as payment for borrowing money.
Unsecured vs. Secured Debt
Depending on the risk involved for the creditor and terms of allotment, all debt can be classified into two broad types: unsecured and secured. It’s important to understand what the term “collateral” means to understand the difference between the two.
Collateral refers to a commodity with value (money, property, gold, etc.) which can be held as a guarantee by the creditor against the debt. Collateral assures the creditor that if you fail to repay the debt, the creditor can use (sell or acquire) it to recover the amount you owe.
Secured Debt
Secured debts are protected by collateral. A typical example of secured debt is a car loan. The lender provides you with a lump-sum amount to purchase the car, but places a claim of ownership on the vehicle if you fail to repay the loan within the agreed period.
Here are some key points about secured debt:
- These debts have lower interest rates due to collateral
- They’re relatively safe investments for creditors
- Common examples include car loans, mortgages, and gold loans
Unsecured Debt
Unsecured debt is a type of debt that's not protected by collateral. This means that you don’t have to lien any existing assets to the lender to guarantee debt repayment.
Here are a few things to know about unsecured debts:
- They have high interest rates due to the absence of collateral
- These debts are risky for creditors
- Common examples include credit cards, personal loans, and student loans
Manage Secured Debts!
It's essential to make consistent payments on secured debts to avoid losing collateral like a home or car.
Revolving vs. Installment Debt
Another classification of debt is based on your repayment schedule. The money you borrow can be repaid in equal regular installments or continually used with partial payments.
Revolving Debt
One of the most common forms of revolving debt is your credit card. This type of debt is open-ended and comes with a credit limit. You can use a portion of it or up to the total credit limit and pay it before the billing cycle ends (usually a month). The credit limit is then replenished.
There’s also an option to pay a portion of the outstanding amount (used credit limit), usually called the minimum payment. However, paying only the minimum each month means you’ll pay high interest rates on the outstanding balance, which can add up over time.
The most common examples of revolving debt are credit cards and lines of credit. The best use of these kinds of debt is paying the outstanding balance in full every month.
Installment Debt
Installments are the most common mode of repayment for debts. In this close-ended arrangement, debt extends for a specific period (months or years) on a fixed or variable interest rate, which can vary based on different factors.
Each installment includes a portion of the principal and interest charge. Failure to repay installments on time can result in a low credit score, legal action, or seizure of assets. Installment debts can be secured or unsecured. Some common examples include car loans, home loans, student loans, and personal loans.
Types of Consumer Debt
| Credit Card Debt | Unsecured, revolving debt; Average interest rate 25.33% |
| Mortgage Debt | Secured, installment debt; Variable or fixed interest rate. Interest can be tax-deductible |
| Personal Loans | Unsecured, installment debt; Current interest rates between 6% and 36% |
| Student Loans | Unsecured, installment debt; Lowest interest rate 6.39% |
| Auto Loans | Secured, installment debt; Average interest 6.80% for new and 11.54% for used cars |
| Medical Debt | Unsecured debt; Can be an installment debt if you set up a repayment plan |
| Tax Debt | Unsecured debt; Federal short-term plus 3% interest rate |
Here's a detailed look at the different types of consumer debt:
1. Credit Card Debt
Over 90% of consumers in the U.S. have at least one credit card, making this payment method one of the top choices for purchasing goods or services.
Credit card debt is a revolving and unsecured debt. Whether you can open a credit card and the limit you qualify for will depend on your credit score and other factors.
Interest rates for credit card debts are usually high because they're unsecured. With the current average credit card rate at 25.33%, it’s important to charge only what you can afford to repay on your card and clear your balance in full each billing cycle.
2. Mortgage Debt
The leading source of debt for Americans is mortgage debt. Mortgages are secured and installment debts with a typical repayment period of 15 to 30 years. The interest paid on the mortgage is usually tax-deductible.
Interest rates on a mortgage can be fixed or variable. Fixed interest means that debtors opt for a loan with a set interest rate over the entire mortgage based on current rates at the date of closing. Variable rate mortgages adjust interest at different intervals, based on current interest rates at the time of adjustment. This could be risky if interest rates increase or helpful if they decrease from the date of purchase.
3. Personal Loans
Personal loans are unsecured installment loans that can be used for any purpose. You'll need a good credit score, reliable source of income, and low debt-to-income ratio to secure a personal loan at a reasonable interest rate.
These loans typically have a duration of 12 to 60 months, with interest rates between 6% and 36%. Interest paid on a personal loan is not tax-deductible.
4. Student Loans
Most students take on federal loans to pay for college tuition, making student loans a big contributor to consumer debt in America. Congress sets the rates for these unsecured loans, with interest rates at 6.39% for the 2025/2026 school year.
These loans usually have a repayment term of ten years, but plans are flexible compared to other loans. Interest paid on student loans is tax-deductible, and these usually cannot be discharged when filing bankruptcy.
Students can also take out private student loans with interest as high as 17.99%.
5. Auto Loans
Auto loans are secured installment loans where the lender treats the vehicle as collateral. These loans usually have a term of three to six years. The average interest rate for new cars is around 6%, or 11% for used, depending on your credit score.
Since auto lonas are secured, creditors are legally allowed to seize your vehicle if you fail to repay the loan. Payments made for auto loans are not tax-deductible.
6. Medical Debt
Medical debts are unsecured and are incurred when you can’t pay your medical bills in full. For example, if you get treated at a hospital and can’t clear your bill, you may be able to work out a repayment plan with the hospital’s billing department and negotiate a lower service price.
The IRS allows you to deduct qualified unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. Keep in mind that eligibility depends on your income and specific medical circumstances.
A good health insurance plan is always the best option to avoid unsustainable medical debt. However, your insurance plan may not cover certain expenses, and you could still incur debt after a major medical event.
7. Tax Debt
Tax debt occurs when you fail to pay your taxes or if there are inaccuracies on your tax returns. The interest on outstanding tax compounds daily at the federal short-term rate plus 3 percent.
Overlooking tax debt for an extended period can result in a significant amount of interest and penalties. Avoid tax debt by filing your taxes properly under the guidance of a qualified tax consultant and send any funds you owe to the IRS immediately.
How To Pay Off Debt
Too much debt can cripple your personal finances and effect your personal life. Follow these expert tips and advice to pay off your debt effectively:
- Never take on more debt than you can pay. Make a plan to repay debt before you borrow. For example, ensure you have enough cash to pay your auto loan each month to avoid making payments on your car with a credit card.
- Try to pay off existing debts fast. Pay credit card debts in full at the end of each month. Use debt repayment strategies like debt snowball or avalanche if you’re starting to carry a balance.
- Maintain a good credit score and credit history. Your credit history plays a vital role in determining what interest rates you’ll qualify for if you decide to consolidate debts. Pay bills in full and on time to maintain a strong credit score.
- Enroll in a debt relief plan. When debt becomes overwhelming, enlist professional help. Debt relief programs help you create a payment plan based on your financial needs.
Find Trusted Help for Debt Relief
With so many different types of debt available, it’s important to understand how they work and the risks involved. Regardless of the type of loan you borrow, take time to compare interest rates offered by different lenders and make a plan to repay debt.
However, if you're stuck with large balances on unsecured debts like credit cards or personal loans, consider partnering with TurboDebt® to overcome your financial burdens. With over 20,000 positive reviews across Trustpilot and Google, we've proven ourselves as a trusted partner for consumer debt relief.
At TurboDebt, you'll work with experts to create a debt relief plan leveraging your monthly income to pay off debt quickly. We can also negotiate with creditors to help you settle debts for less than what you currently owe (before fees).
It only takes a few minutes to find out if you qualify. Contact the team at TurboDebt today to start your free consultation. It's time to start your journey toward a debt-free life!