Debt Info – 5 Common Types of Debt

When it comes to debt, there is a wide range of different types, with some forms of debt falling into numerous categories. For instance, all debt is either secured or unsecured, but a mortgage and a car finance agreement (both of which are secured loans) look very different from each other.

Some types of debt are also considered to be a higher priority than others. This is due to the fact that the consequences of non-payment are more severe. You could be at risk of losing your assets, such as your home or vehicle.

To help you gain a better understanding of the most common types of debt, we’ve explored five different categories of debt below:

1. Consumer Credit

While the name sounds a little ambiguous, the ‘consumer’ part of consumer credit refers to the Consumer Credit Act 1974. The majority of this type of debt in the UK is regulated by this Act, which covers your rights when borrowing money. Thus if you were to fall behind with your repayments, you’d be protected from unfair debt collection practices.

Consumer credit includes things like personal loans, short term loans, credit cards, guarantor loans, car finance, and store credit. With most of these options, you’d borrow a set amount, and then make fixed monthly payments to the creditor. This could be over the period of months or years.

If they are fixed, the lender has to let you know how much the instalments will be each month, before you sign the loan agreement. This makes them easier to budget for. Credit cards and store credit work a little differently though - you’ll need to ensure you’re at least paying the minimum amount each month, and should always read the terms and conditions very carefully.

Most loans will have interest applied, which will be repaid alongside the principal amount borrowed. The rate of interest will depend on various factors, including how much you’re borrowing, the loan terms, and how good your credit score is.

common types of debt

2. Business Debts

In terms of business and tax debts, these will generally be owed to Her Majesty's Revenue and Customs (HMRC), and include NI and VAT arrears, as well as Income Tax (PAYE). All of these debts are classed as priority debts, as there can be serious consequences for not paying them. Court action could be taken, and bailiffs, or enforcement agents, may remove and sell your assets to pay off the debt.

If you are facing tax arrears, the first thing you need to do is check that the outstanding balance is correct. Next, you should work out how much you’re able to pay towards the arrears, by completing a budget. You should then contact HMRC and set up a payment arrangement, making monthly payments and keeping them updated should anything change.

3. Contract Debts

Contract debts include anything in which you enter into a contract for over a minimum period. This is generally a regular service such as a mobile phone contract, a TV package, or gym membership. Even if you’re no longer using the service, and wish to end the contract early, there is a good chance that you’ll have to pay the remainder of the contract. And if you fall behind on payments, you’d need to cover these on top of your regular due payments.

As per the terms of your contract, should you stop paying entirely, your account with the company would fall into arrears, and you’d lose access to the service provided. If appropriate action is not taken after your account fell into arrears, it could then default, and further action could be taken. The debt would be dealt with in the same way as other unsecured debts, with potential court action later down the line.

The best thing to do if you’re struggling to keep to your contract is to get in touch with your service provider as soon as possible. They can then discuss your options with you, such as arranging a payment plan or setting up a reduced settlement payment. You may even be able to cancel your contract without having to pay a fee - this will usually depend on the terms of the agreement and the reason for cancellation.

common debt types

4. Housing Debts

If someone were to have housing debts, this may refer to either rental payments or mortgage payments. The obvious concern with this type of debt is that you’re at risk of losing your home. Unless it’s due to a one-off event, struggling to pay your rent or mortgage could be a sign of financial difficulties. You may therefore wish to speak to an independent third party, such as Step Change or the Citizens Advice Bureau about the choices you have moving forward.

For instance, you may be eligible for Breathing Space in terms of your rent, or a payment holiday in terms of your mortgage. Both of these options will give you a little bit of time to get your finances in order, though do bear in mind that you will need to catch up with your missed payments over the months following the payment break.

5. Payday Loan Debts

If you’re unfamiliar with the term, a payday loan is a type of loan where you borrow a relatively small amount of money for a short period of time, and then repay the loan in full when you next receive your wages. As payday loans are aimed at people with a bad credit rating, the interest tends to be higher than with other forms of credit.

While payday loan debts are generally relatively small, as people usually borrow between £100 and £1,000, taking out too many short term loans can result in financial hardship. People may also enter what is known as a debt spiral, where they take out further loans to cover the payments of previous ones.

As with any of the examples above, if you're struggling with payday loan debt, it’s sensible to speak to a free and impartial organisation, who can discuss your options with you. This could be something as simple as setting up a payment arrangement, or could be a debt management or insolvency solution. They’ll take your individual circumstances into account, and will let you know about any long term ramifications of any option you’re considering.