Understanding Debt
Debt can be a crippling and painful experience, but it is not always bad. Understanding debt is important as sometimes it can be a form of investment such as borrowing money to buy a house.
The beginning of debt management is to understand what a debt actually is and the different types of debt that exist.
What is debt?
It is defined by the Oxford dictionary as a sum of money that somebody owes. Or it can be something owed by one party to another.
Different types of debt
There are three broad categories of debt: secured debt, unsecured debt, and mortgages.
1. Secured debt typically has a lower rate than unsecured debts like credit cards or loans.
2. Mortgages have rates that depend on the type and who you currently borrow from (for example, bank loans or private lenders).
3. Unsecured debts are ones that do not need collateral such as credit cards, store cards, mobile phone contracts and overdrafts.
How do I pay off my debt?
There are three main ways to pay off your debt:
1. Repaying the debt over time;
2. Negotiating with creditors to reduce the amount owed;
3. Agreeing to using a debt relief program.
What is the difference between repayment and negotiating?
Repaying your debt
This is when you pay off your debts in order to repay it in full or over time. For people who have a small amount of debt and want to negotiate with creditors, it is best to speak with them initially about options for reducing interest rates or negotiating for more time on the debt.
Negotiating with creditors to reduce the amount owed
Negotiating with your creditors means you negotiate on what you owe, whether it be a lower interest rate or a shorter repayment plan. If a creditor agrees to reduce the amount of your debt, there may not be any interest charged on it. Debtors in default typically have a large amount of debt and want to negotiate with creditors.
Debt relief programs
Debt relief programs are programs that allow you to repay your debt over time by receiving cash payments or by working off the amount of your debt in order to avoid interest charges. Using a debt relief program to lower the amount owed.