Types of Debt

The UK is no stranger to debt, with the average household owing £60,213 as of December 2019. It’s easy to dismiss borrowing money or taking out other forms of credit as a bad thing – but in reality, taking on debts that are managed properly can help you to reach major life milestones such as purchasing a home or even pursuing further education.

There are many types of debt, and each works in a slightly different way that equally requires a different level of management from the debtor. One thing that remains common across the various categories of debt, however, is the importance of understanding your situation and doing what is required of you to keep your debt under control.  

Categories of Debt

Debt comes in many forms ranging from credit cards and personal loans to mortgages and tax arrears. Even despite there being such a variety on offer, debts can generally be split into two categories: secured debt and unsecured debt.

Secured Debts involve taking out credit against an asset. One of the most common examples of this is a mortgage taken out against your home. A mortgage provider will secure the debt against your property, which could be repossessed to recover the debt if you are unable to make the agreed repayments. Debts that fall into this bracket also include things like car loans, and in some cases debts that require a guarantor are even categorised as secured because a lender can seek repayment from another source even without having taken security against your assets.  

Unsecured Debts, in contrast, are not taken out against an asset and generally do not require a guarantor. If you are unable to meet your repayment obligations, the creditor cannot repossess your assets but may still pursue other forms of enforcement action. Despite their differences, failing to repay both secured and unsecured debts could negatively impact your credit score and cause other difficulties.

What are priority debts?

Business Owner

Whilst all debt is undoubtedly important, some debts should be classed as a priority and dealt with accordingly. This is because the consequences of failing to pay priority debts can be extremely severe and could even lead to you losing your home, for instance.

Which debts are a priority will vary from person to person, but commonly include the costs of keeping a roof over your head (via mortgage or rent payments), utility bills,  keeping up-to-date with tax payments (including council tax, income tax, national insurance and VAT payments), and ensuring that any court fines are paid in a timely manner. People that are required to make child maintenance payments or who have acquired something essential (such as a vehicle that they need in order to work) on hire purchase may also class these liabilities as priority debts.

What types of debt are there?

As we have mentioned, debts come in many forms, and some of the most common types are listed below.

Joint DebtsCourt finesHousing debtsPayday loans
Business debtsCredit card debtBenefits overpaymentsPersistent debt
Consumer creditDebts to friends&familyMortgage debtsStatute-barred debt
Contract debtHire purchaseDebts to other peopleStudent debt
TaxUtility bill debtsSecured DebtUnsecured Debt

What is the difference between manageable and unmanageable debt?

Managing debt can be difficult, and whilst anybody taking out credit does so with the best of intentions, it can be all too easy to find yourself in an unmanageable situation. Whether any line of credit or debt will be manageable depends on your circumstances, and it can be extremely helpful to understand what the total cost of a debt will be before taking it on – with charges, fees and interest included

Debt Key Terms

Key terms

Debt can be a complex topic, regardless of what you owe and to who. The finance industry uses a lot of jargon and anybody would be forgiven for not quite knowing exactly what a particular term means. Understanding your status and knowing your obligations are both crucial elements of successfully managing debt, and it can never hurt to learn more about how your financial liabilities work.

Listed below are definitions for some key terms that commonly appear across debt documentation.

Annual Percentage Rate (APR)The APR figure shows the amount of interest that will be applied to credit that you take out and takes into account all relevant charges. It can help you to compare the cost of debts of the same kind.
Annual Equivalent Rate (AER)This rate shows the amount of interest you would earn on a savings account for over a year.
ArrearsThese are missed payments – for instance if you fail to pay your rent for a month, you’ll be in arrears by one month.
Credit File Your credit file is a record of your financial history which contains details of money you’ve borrowed and any payments that you have made or missed. It is also known as a credit report.
Credit RatingYour credit rating (or credit score) is a grading that is based on the details in your credit file that helps creditors to determine if you are eligible for further borrowing.
CreditorA creditor is a person or company who lends you money or otherwise provides you with credit.
DebtorA person or company that owes money to a creditor.
GuarantorA person who agrees to pay a debt if the debtor fails to do so.
InsolvencyA formal legal process that can write off existing debt. Examples include bankruptcy, an individual voluntary arrangement (IVA) or protected trust deed.
InterestA charge for borrowing money, or a reward for saving it. Interest is usually shown as a percentage for example 15%.