What Is Debt? Common Types, Definitions and How To Pay Off

Key takeaways

• In simple words, debt is money you must repay.
• There are different types of debt, and not all of it is “bad debt.”
• Ways to get out of debt range from simple budgeting to the avalanche or snowflake method.

Debt is something you owe, usually to a business or a person. But understanding debt also involves knowing how debt works, which kind is “good debt,” and how to pay it back.

What is debt?

As mentioned, debt is money or something of value which you must repay. Most people face debt at some point in their lives. A recent LendingTree study showed that residents in the top 50 U.S. metros have, on average, almost $38,000 in debt, not counting mortgages.

When you hear the term “debt,” it often means “consumer debt,” which is when a person borrows to buy goods and then pays it back, usually with interest.

(“The debt,” meanwhile, can also refer to the U.S. federal government’s debt, which is borrowed mostly via Treasury securities. The national debt as of March 2025 was more than $36 trillion.)

Types of debt defined

Consumer debt comes in different types. Here are the four major categories:

• Secured debt: Also called a collateral loan, this is debt that requires you to put something up to back the loan, called collateral. The lender can take possession of your collateral if you don’t repay your loan, like with auto repossession or foreclosure on a mortgage or home equity loan.
• Unsecured debt: Unsecured loans are not backed by collateral. Instead, the lender will offer you a loan based on your credit history and score. Because these loans are riskier for the lender, they can be harder to qualify for and have higher interest rates. Examples of unsecured loans include student loans and some personal loans.
• Revolving debt: Revolving debt you can repeatedly draw from a line of credit, instead of a lump sum, paying it back as you, like with a credit card, personal lines of credit or home equity line or credit. You’ll owe interest on the amount you borrow, but you don’t need to repay it all by a specific date, just a portion. The danger with revolving debt is that the interest can add up quickly if you only repay the minimum amount.
• Installment debt: Installment loans are the opposite of revolving debt, giving you a lump sum upfront which you pay back (with interest) in fixed monthly payments. These loans can be either secured (like an auto loan or mortgage) or unsecured (like student loans or “buy now, pay later” loans).

Popular types of debt

Within the different types of debt, some of the most popular forms include these:

• Mortgage debt: Mortgages are secured installment loans where your house serves as collateral. Each month, you pay back part of your principal, plus interest, until your loan is fully repaid. If you don’t repay it, the lender can take your home. Mortgage debt accounts for over 70% of consumer debt in the U.S. (Check out U.S. mortgage statistics here.)
• Student loan debt: Student loan debt — money borrowed to pay for education expenses — is a type of unsecured installment loan. When borrowed from the federal government, it’s called a federal student loan, and when borrowed from a bank or other lender, it’s called a private student loan. (Check out U.S. student loan statistics here.)
• Credit card debt: Credit cards are a kind of unsecured revolving debt, and they often come with higher interest rates than other consumer debt. This is why paying off your credit card balances every month is so important. (Check out U.S. credit card statistics here.)
• Auto loan debt: Car loans are used to buy a new or used vehicle, and they are usually — but not always — secured loans, with the vehicle serving as collateral. Almost 8 in 10 new car buyers use an auto loan. (Check out U.S. auto loan statistics here.)
• Personal loan debt: With a personal loan, you get a lump sum of money — often ranging anywhere from $600 to $200,000, with repayment usually required within two to five years. You can use personal loans for just about anything, and they can be secured or unsecured, with unsecured loans usually having higher interest rates but without the risk of losing your collateral. (Check out U.S. personal loan statistics here.)
• Business debt: Business loans are designed specifically for entrepreneurs who need financing for their businesses. They can be installment loans (often called term loans) with an upfront lump sum, or they can be revolving lines of credit that function like a credit card. Other types of business debt include equipment financing, merchant cash advances and invoice financing and factoring.

Good vs. bad debt: How they compare

Not all debt is created equal. Sometimes borrowing money is actually a smart move, but sometimes it’s a threat to your finances. Here’s how to distinguish between good debt and bad debt.

 Good debt

Good debt is borrowed money that can improve your overall financial situation over time. For example, it may help you boost your future earning potential or buy something that will rise in value over time. Good debt should also have lower interest rates and more favorable terms than bad debt. Examples of good debt might be some student loans, mortgages and small business loans.

Bad debt

Bad debt does not help you improve your finances and is often used for things that decline in value (like most cars) or is used up right away (like for a vacation). Bad debt can also refer to loans with high interest rates and unfavorable terms. Examples of bad debt might include some credit card debt, as well as payday loans and high-interest personal loans.

How to pay off debt

No matter what type of debt you have, you should craft a plan to pay it off, even if it’s good debt. Here are some strategies to help you get debt-free:

• Use a debt payoff method: Find a debt payoff method that suits your type of debt and personal preferences. For example, the snowball method involves paying off your smallest debt first in order to get a confidence boost from paying off an account quickly. On the other hand, the avalanche method calls for paying the highest interest rate debt first to save money on interest.
• Create a budget: A personal budget can help you take control of your spending and find money to repay your debts. There are different budgeting strategies you can try, and even budget apps you can install on your phone.
• Work with a credit counselor: These professionals can work with you to create a budget, pay off debt and create a debt management plan. Many nonprofits offer credit counseling, sometimes providing a free initial consultation to discuss how they can help.
• Get a debt consolidation loan: A debt consolidation loan can sometimes make your debt more manageable. It involves taking out a single, larger personal loan and using those funds to pay off your smaller debts, trading multiple loans for one. You’ll still have debt, but it will be easier to track and may even have a lower interest rate than your previous debt.

Common debt terms to know

Although you can now define debt, you might also need to know other terms, like “amortization” or “arrear.” Here are some of the most common and important debt terms to add to your vocabulary:

• APR (annual percentage rate) and interest rate: The annual percentage rate, or APR, is often confused with interest rate, but the two are not always the same. APR is the total yearly cost of a loan, including not just the interest rate, but also the loan fees.
• Principal: The principal of a loan is the amount you borrowed and received from the lender. It doesn’t include the interest or fees you will pay for the loan.
• Interest: Interest is the amount you’re being charged to borrow money. It’s usually written as a percentage of the total loan amount. The higher the interest rate, the more expensive the loan.
• Delinquency: Delinquency means being late on your loan payment — sometimes even by just one day, though usually there’s a grace period. Delinquency can result in late fees, APR penalties or even legal action, so it’s important to know what to do when you have delinquent debt to get your account back in good standing.
• Default: Default is what happens when delinquency goes too far. If you repeatedly miss payments, your debt could be considered in default and you could face debt collectors or legal action.
• Arrear: “Arrear” is another term for “overdue.” Money that is in arrears hasn’t been paid back by its due date.
• Fixed and variable interest: Interest rates can be fixed or variable. Fixed interest does not change (unless the lender notifies you beforehand), while variable interest rates move up and down based on market conditions. can change without notice.
• Amortization: An amortizing loan is one in which part of your payments go toward the principal and part go toward the interest. The loan will have an “amortization schedule” showing how each payment is divided between the two, with your early payments mostly paying down the interest.
• Debt-to-income ratio: Your debt-to-income (DTI) ratio compares how much you earn versus how much you owe. It’s calculated by dividing your monthly debt by your monthly income. Lenders may look at your DTI when considering you for a loan, so having a good debt-to-income ratio is important.
• Credit score: Your credit score measures how likely you are to pay your debts on time. It is a three digit number that usually ranges from 300 to 850, with a higher number being better. Your score can affect many financial opportunities, from the apartments and credit cards you qualify for to the interest rate you get on a loan. You can view your credit score for free with LendingTree Spring.