Types of Debt

Debt isn’t one-size-fits-all. The type of debt you have affects your interest rate, your repayment options, and the consequences of falling behind. Knowing the differences between various types of debt helps you prioritize your payoff strategy and understand what you’re working with. Let’s break down the most common kinds.

Credit Card Debt

Credit cards are the most common form of revolving debt — meaning you have a credit limit and can borrow, repay, and borrow again. You only pay interest on what you carry past your billing cycle.

Key details:

• APRs typically range from 18% to 28%
• Minimum payments are usually 1-3% of your balance
• Interest compounds daily on most cards
• Carrying a balance month to month is where the real cost adds up

Credit card debt is one of the most expensive types of debt because of those high interest rates. It’s often the first target in any debt payoff plan.

Student Loans

Student loans come in two main varieties:

Federal student loans are issued by the government and come with fixed interest rates, income-driven repayment plans, and potential loan forgiveness programs. They’re generally more flexible and borrower-friendly.

Private student loans come from banks, credit unions, or online lenders. They often have variable interest rates and far fewer protections. There’s usually no forgiveness option and limited hardship relief.

Key details:

• Federal rates are set annually (currently around 5-8% depending on loan type)
• Private rates vary widely based on credit
• Federal loans offer deferment, forbearance, and income-based repayment
• Student loan debt is very difficult to discharge in bankruptcy

Medical Debt

Medical debt is one of the most common reasons people fall into financial hardship — and it’s usually not by choice. A single hospital visit, surgery, or chronic condition can generate bills that overwhelm even people with insurance.

Key details:

• Medical debt often carries no interest if paid directly to the provider (but collection agencies may add fees)
• Many hospitals offer charity care programs and payment plans
• Recent changes mean paid medical collections are removed from credit reports
• Unpaid medical debt under $500 is no longer reported to credit bureaus
• The No Surprises Act protects you from unexpected out-of-network bills in emergency situations

Always negotiate medical bills before paying. Providers frequently reduce charges, especially if you ask for an itemized bill and compare prices.

Mortgage Debt

A mortgage is a long-term loan used to buy a home. It’s secured by the property itself, which means the lender can foreclose if you don’t pay.

Key details:

• Typical terms are 15 or 30 years
• Interest rates are among the lowest of any debt type (currently around 6-8%)
• Interest may be tax-deductible
• Building equity in your home is a form of forced savings

Mortgages are generally considered “good debt” because homes tend to appreciate in value over time. But borrowing more than you can comfortably afford can turn a mortgage into a financial burden.

Auto Loans

Auto loans are installment loans used to buy a vehicle. The car serves as collateral.

Key details:

• Typical terms are 3-7 years
• Interest rates range from 5% to 14%, depending on your credit
• Cars depreciate quickly — often losing 20% of their value in the first year
• Longer loan terms mean lower payments but more total interest and a higher risk of being “underwater” (owing more than the car is worth)

If you need a car to get to work, an auto loan can be a practical necessity. Just aim for the shortest term you can afford and avoid rolling negative equity from a previous car into a new loan.

Buy Now, Pay Later (BNPL)

BNPL services like Affirm, Klarna, and Afterpay let you split purchases into smaller installments, often with no interest if you pay on time.

Key details:

• Typically 4 payments over 6-8 weeks
• Some plans charge interest, especially longer-term ones
• Missed payments can result in late fees or deferred interest
• BNPL is increasingly being reported to credit bureaus
• Easy to accumulate multiple BNPL plans without realizing the total

BNPL feels harmless because of the small payment amounts, but it can encourage overspending and make it hard to track what you actually owe across different services.

Personal Loans

Personal loans are lump-sum installment loans that you repay in fixed monthly payments over a set term, usually 2-7 years. Most are unsecured (no collateral required).

Key details:

• Interest rates range from about 6% to 36%, depending on your credit
• Fixed payments make budgeting straightforward
• Commonly used for debt consolidation, home improvements, or large expenses
• Some lenders charge origination fees (1-8% of the loan amount)

A personal loan with a lower rate than your credit cards can be a smart consolidation tool. But make sure you don’t run up new credit card balances after paying them off with the loan.

Payday Loans

Payday loans are short-term, high-cost loans meant to tide you over until your next paycheck. They’re one of the most expensive forms of borrowing.

Key details:

• Typical fees of $15-$30 per $100 borrowed, translating to APRs of 300-500%
• Due in full on your next payday, usually within two weeks
• Designed to trap borrowers in a cycle of reborrowing
• Regulations vary by state — some states have banned them entirely

If you’re considering a payday loan, explore every other option first: borrowing from family, negotiating with your creditor, using a credit card, or seeking help from a nonprofit credit counselor.

Bottom Line

Different types of debt come with different costs, risks, and repayment options. High-interest debts like credit cards and payday loans should generally be your top priority for payoff, while lower-rate debts like mortgages and federal student loans can be managed more gradually. Knowing what you’re dealing with is the first step toward building a plan that works.