by Marianne Pelletier

Created on: February 23, 2010   Last Updated: February 24, 2010

An individual can take on several forms of debt, with differing interest rates and consequences. Here is a list in order of the security and interest rate levels.

 -A mortgage is used to buy a piece of real estate. It is called “real estate” or “real property” because it is the only thing known to humans that does not depreciate. In other words, once you own a chunk of land, you own that land. It may go up or down in market value, but it is still a piece of the surface of the world. A mortgage loan is taken on for a period from 15 to 30 years, and, until recently, was rather tightly regulated. Mortgage loans usually carry the lowest interest rates, because they are secured by the property. If you don’t pay your mortgage, you lose your house. Home equity loans are really additional mortgages put against a piece of real estate.

 -A student loan is a personal loan, but backed by the federal government. In addition, even though it is unsecured, the federal government can collect the balance from your tax refunds. The check is written to the educational institution that you’re attending, and the payout is very long. Interest rates are quite low since the government backs the loan. Other loans like this include incentive loans that state governments use, for instance, the state of New York covers some of the interest percentage points for a loan for a windmill in order to produce more renewable electricity in the state.

 -A car loan, boat loan, or other vehicle loan is secured because the loan company can repossess your vehicle if you don’t pay the loan. It is usually offered as a percentage of your car’s market price, and is better negotiated with your bank or credit union before you see a dealer. Car dealers take an extra interest rate point off of your loan, leaving you with a higher rate. The largest car manufacturers have their own credit companies offering car loans.

 -A credit card is called a revolving credit account because you can pay down the balance and then spend it back up again, or maintain a balance for several years, paying a whole lot of interest. The credit card company counts on you to repay your balance and interest, and credit cards are known for charging the highest late fees, over limit fees, and other fees of any loan type. Since credit card debt is unsecured, that is, not backed by an asset, the credit card company cannot take anything away from you if you default. However, the record will hurt your credit rating. There are a wealth of credit card options because they are used so widely in the retail market. Store credit cards carry the highest interest rates of all.

-A personal loan is an unsecured loan that you borrow from either a bank or from a peer to peer lending site. You can make a personal loan against your savings account as well, reducing the interest rate effectively because you still are earning interest on the savings. These carry fairly high interest rates because of the likelihood of a borrower defaulting. A personal loan differs from a credit card in that there is a fixed amount borrowed and a fixed term to repay the loan.

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