by Anne Wayman

Created on: January 26, 2009   Last Updated: March 19, 2010

Living free of unsecured debt, even free of all debt, may seem impossible. Small wonder, every day we're bombarded with the idea that using credit cards is the way to a good life and the notion that incurring the debt of driving a new car or paying a mortgage is just the way things are done.

What the advertisements never tell us, at least in a way that's clearly understood, is the actual cost of that debt. In fact, they don't quite make it clear is how that debt actually works.

Debt falls into two broad categories, secured and unsecured. Secured debt means that if you can't pay the debt, you have to give back the item. This type of debt is reserved for items like cars, fine jewelry, fine art, and houses that have true resale value. The amount of the loan is usually figured not only on your credit but on the value of whatever is being financed. Of course, if the economy falters, you may well find yourself upside down as so many people with home mortgages are discovering today.

Unsecured debt, which most of us know as credit card debt, has no security. If you charge a pair of $100 boots and can't pay for them, the credit card company can't take back the boots, but they can come after you in many other ways.

Although you never see the cash, with both secured and unsecured debt you're actually borrowing (making use of) money from a third party to pay for the purchase. You then owe that third party both the amount borrowed plus the interest or rent on that amount. Interest is expressed as a percentage that you'll pay on the balance or principle that you owe. How much interest you'll pay depends on a number of things, but as a general rule, interest rates on secured debt are less than on unsecured debt.

Although the law insists that lenders let you know how much you're paying in interest, expressed as APR which stands for the Annual Percentage Rate of your loan, it's not always clear exactly how much a loan actually costs you. It's startling.

Take, for example, a $300,000 mortgage payable over 30 years at 6% interest. According to BankRate.com your total payments will be $664,975.79 of which $364,975.79 is interest. You're paying more in interest than you are for the property. (Search on total interest paid to find calculators that will give you this information.)

Credit cards are even more frightening. Assume you have $10,000 in credit card debt with an interest rate of 18% and you're making the minimum payments which start at $250 a month. If you never charge

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