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How Debt Works

Want to learn how debt works?

Educating yourself will keep you from mistakes and give you mastery over it. Let's dig in!

In the past, pay-as-you-go was the normal way that families got ahead in life. However, in today's immediate-gratification society, debt can seem almost essential to getting anything productive done.

We use debt to purchase cars, buy homes. Some even use debt for everyday living expenses, like groceries and clothing.

In fact, with the proliferation of debt, it's not at all uncommon to actually use lines of debt to pay bills, creating a never-ending cycle that most people find difficult to dig out of.

It's hard to undo a debt problem if you don't understand what debt looks like and how debt works.

There are several different ways that debt is categorized.

Secured or Unsecured Debt

how debt works

This is one of the most important designations when it comes to debt.

What does it mean to you?

Secured debt indicates that the amount you owe is attached to something tangible. In most cases, this is a home or a car.

When you went to obtain the note, collateral was offered. If you default, there is recourse for your lender, as they can take back the tangible property.

Unsecured debt is anything that is not attached to collateral. The most common type of unsecured debt is what you are offered through your credit card.

The company doesn't keep track of every pair of shoes that you buy and demand that you turn them over if you default.

Installment or Revolving Debt

This category is determined by what the debt looks like.

In simple terms, installment debt has a set term and a regular payment amount every month. Your mortgage or car loan are probably installment debt, but things like rent-to-own agreements for household goods can also fall into this category.

Revolving debt is constantly fluctuating. Your balance can be increased at any time, so the amount owed changes as well. Credit cards are a revolving debt.

Demand or Call Loan Debt

Another, less common, designation is what is known as a demand loan or call loan. This just means that there isn't really a specific term that is being offered for the use of the money.

When you are lending in this type of scenario, the bank or lender can demand, or call in, the loan amount whenever they like.

Obviously, you don't want to end up in this precarious position unless you have a bit of insurance yourself. That is why demand loans are usually only written between parties that are comfortable with the integrity that is present in the deal.

A demand loan may be offered between family members, for example, or in a long-standing business relationship.

Debt can be overwhelming. However, when you understand how debt works, it is easier to navigate your way through the process successfully.

Now that you know a little more about how debt works, it is possible to get out of debt, regardless of what types you are carrying.

Resources are available to help and thousands of people do it on their own. It takes discipline and commitment, but you can do it as well.

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