What types of debt are there? –
What we're covering..
It’s really common to need to borrow money at some point (even celebrities do it!)- but there are so many different and confusing ways that people get into debt!
Hire purchase? Payday loans? Overdrafts? Loan sharks? 🦈
What do they mean?? 🤷♀️
Today we’re explaining the most common ways that people owe money!
Disclaimer: This website provides information for guidance and educational purposes only. The Grown-Up School does not provide regulated financial advice. You can seek independent financial advice from a suitably qualified and regulated professional advisor. Check out our disclaimer policy for more information.
What is debt? 💸
Debt is where you borrow money from someone.
Usually people borrow money to pay for things they could not normally afford.
Most of us need to borrow money at some point, and it’s not always a bad thing.
The most important thing is to borrow safely and sensibly! 🔐
Check out our article How to avoid debt problems 🌪️ for information about avoiding debt problems!
Why might you owe money? 💳
1. Borrowing from people you know – family, friends 👪
“Can you lend me a tenner?” – borrowing from family/friends is one of the most common types of debt!
Some people prefer lending from family/friends because they may not have to pay interest (extra money) on the loan. — (What is interest? (easy explanation) 📈)
Did you know that family members could potentially take you to court if you don’t repay money you’ve borrowed from them? 👩⚖️
2. Utility bills (gas, water, electricity) 💦
Energy – gas and electricity ⚡🔥
There are 2 main ways that people pay for their gas and electricity in the UK:
Prepayment meters 💳
If you have a prepayment meter, you get given a plastic card that you can “top up” with money to pay for your energy (either at shops or via an app 📱).
When your energy card runs out of money, your gas/electricity will turn off.
Your energy won’t turn back on until you “top up” your card! 📴
Some suppliers will offer “emergency money/credit” on your card so that if you run out of money your energy won’t turn off – but, you need to pay this back! 🚑
This is one of the most expensive ways to pay for your energy! 💸
Monthly direct debits/credit meters 🔁
With monthly direct debits/credit meters, you pay a set amount every month for your energy. 💸
You’ll need to send your energy company “meter readings” to find out how much energy you’ve actually used. 📏
Once your meter readings have been evaluated, the energy company could do 2 things:
- If you’ve paid too much — you’ll have extra money in “credit” on your account that you can claim back. 💰
- If you haven’t paid enough, — you’ll have a “debit” debt on your account that you need to pay back! 🔁
Missing regular monthly bill payments is called “arrears”. If you’re in arrears and owe money for energy, you’ll need to set up a plan to pay it back! Energy companies could cut off your energy if your don’t pay them. 📴
Water bills 🚿
There are two ways that people usually pay their water bills:
- Fixed rate (“unmeasured bills”) – The water company estimates how much water your house will use, and charges you a fixed amount every month 📆
- How much water you actually use -The water company measures how much water you use with a water meter and makes you pay. 📏
If you don’t pay your bills your water company can’t disconnect you — BUT the water company could take you to court. 👩⚖️
3. Student loans 🎓
A student loan is a type of loan that can help you pay for education. 🧑🏫
There are 3 main types of loans you might come across:
- Tuition Fee Loans – borrowing money to pay for your course, these are usually paid directly to the course provider 📚
- Maintenance Loans – borrowing money to pay for day-to-day costs when you’re studying. This could be things like rent, bills, food, transport, and books. These are usually paid to your bank account. 🏡 (click here to read a brilliant student loan guide by MoneySavingExpert!)
- Postgraduate Loans – borrowing money to pay for your course and living costs when you’re studying a master’s degree (master’s/postgraduates are higher qualifications than a “normal” bachelor degree). (click here to read a fantastic postgraduate loan guide by MoneySavingExpert!)
4. Payday loans 💰
Payday loans are short-term loans (you pay them back really quickly e.g. within a month).
With payday loans you usually borrow money and pay it back on your payday.
These loans tend to be very expensive – they charge you a lot of interest (extra money to say thank you) – What is interest? (easy explanation) 📈
5. House bills – rent/mortgage 🏡
Renting is where you pay to use a flat/apartment or a house that somebody else owns.
Missing regular rent payments is called “arrears”. If you’re in arrears, you’ll need to set up a plan to pay it back!
If you don’t pay your rent, you could be at risk of getting evicted (made to leave your home).
A mortgage is where a person borrows money to buy a home or land.
Missing regular mortgage payments is called “arrears”. If you’re in arrears, you’ll need to set up a plan to pay it back!
If you don’t pay your mortgage, you could be at risk of getting your home repossessed (the lender takes back the home off you, and makes you leave your home).
6. Government bills – tax e.g. council tax, income tax 🏛️
Tax is money that people and businesses have to pay to the government.
People pay money to the government in order to get services like police stations, fire and rescue services, and schools. 🚒
There are lots of different types of tax in the UK such as:
- Income tax – paying taxes when you earn money 💼
- Inheritance tax – paying taxes when you inherit money/valuable things from someone who has died 🥀
- Capital gains tax – paying taxes when you sell something that has increased in value e.g. a house, shares in a company. 📈
- Council tax – paying taxes to your local government/council for things like bin collections and schools. 🏫🗑️
- Stamp duty – paying taxes when you buy a home 🏠
In a lot of countries if you don’t pay your taxes, you could get big fines, and potentially even go to prison. 🚓
7. Fines – car parking fines, court fines – criminal offences/lawsuits 👩⚖️
If you’ve been convicted of a crime or been involved in a legal issue, you may have to pay court fines or legal fees.
Court fines are the punishment that a court puts on someone who has been convicted of a crime.
The court fines are usually paid to the government to compensate for any harm that the crime may have caused.
Court fines can be imposed as an alternative to imprisonment – they are typically only imposed for minor crimes like parking violations, traffic violations, and causing issues in public.
It is important to pay your court fines/legal fees because it will help you avoid having to pay more legal fees and penalties in the future.
8. “Consumer credit” – borrowing to buy stuff 🙏
An overdraft lets you borrow extra money through your bank account when it is empty. 🏦
For example, you have no money in your account but the bank lets you spend £15, so your bank balance would be -£15.
Home Credit/Doorstep loans 🪜
Doorstep loans are a type of personal loan where the lenders visit your house to deliver the money and to collect repayments. 🚪
Personal loans 🤝
A personal loan is money that you borrow from a bank or other lender.
You then pay the loan back regularly, and pay extra money to say thank you called interest (What is interest? (easy explanation) 📈). 🔁
You can usually borrow more money with a personal loan than a credit card.
Buy now pay later (BNPL) 📆
Buy now pay later schemes let people buy something without having to pay for it until a later date.
You might be given from up to 30 days or even to up to 12 months to pay it back.
Car finance 🚗
If you can’t afford to buy a car upfront, there are different ways that people borrow money to help pay for one.
This could include things like:
- Personal contract purchase (PCP) 📜 – PCP is basically a loan – but you don’t borrow the full price of the car. With PCP you usually pay a deposit (a chunk of money upfront) and make a set number of monthly payments. You won’t own the car at the end of your agreement, but will have the option of paying extra to buy it at the end.
- Hire purchase (HP) 📉 – Hire purchase is where you pay a deposit (a chunk of money upfront), then pay off the rest in regular installments. You also pay extra money in interest to say thank you (What is interest? (easy explanation) 📈). You “hire” the item until it is fully paid off.
- Personal leasing/personal contract hire (PCH) 🔁 – This is similar to renting a car. With PCH you pay a deposit (a chunk of money upfront) and make a set number of monthly payments, but you won’t own the car at the end of your agreement and will have to give it back.
- Personal loan 🤝 -A personal loan is money that you borrow from a bank or other lender. The bank will give you the money, and then you can use it to buy a car afterwards. You then pay the loan back regularly, and pay extra money to say thank you called interest (What is interest? (easy explanation) 📈). 🔁
Credit card 💳
Credit cards are plastic cards that banks offer you, to help you borrow money to buy things.
When you use a credit card, you are borrowing money. 💸
Usually you have to repay this money regularly (every month) until the loan is paid off.
Getting insurance is where you pay money to “protect yourself” from different emergencies.
If you find yourself in the emergency, you will often be given emergency money to help you.
You can pay for insurance to help you in situations like:
- Your phone breaking (mobile phone insurance) 📱
- Pets getting sick (pet insurance) 🐶
- Your car getting stolen (car insurance) 🚗
- A house fire damaging your building (buildings home insurance) 🔥
- Flooding damaging your belongings at home (contents home insurance) 🚿
- Losing your income because you’ve become ill/disabled (income protection) 💼
- You or your partner passing away (life insurance) 🥀
- You getting a critical illness (critical illness cover) 🩺
- Having troubles on holiday like getting burgled (travel insurance) ✈️
If these emergencies happen you can get paid a sum of emergency money when you have insurance cover in place.
If you miss payments for insurance, you will usually be asked to catch up. 🏃♀️💨
Your insurance company could cancel your insurance if you don’t pay them back, leaving you without insurance, and potentially at risk. 🚫
Hire purchase – car, furniture, appliances 🔁
Hire purchase is where you pay part of the cost of something expensive e.g. a car or furniture, then pay off the rest in regular installments.
You “hire” the item until it is fully paid off. 🚗💨
If you don’t pay off the loan, the company could take the expensive thing back off you e.g. taking your car off you.
9. Borrowing with other people – joint debts 💞
You could borrow money with someone else through things like:
- Borrowing money to buy a house together (mortgages – What is a mortgage? 🏡) 🏡
- Taking out a joint loan 💸
- Getting a joint bank account 🏦
- Taking out a joint credit card 💳
If you borrow money with someone else, both you AND the other person both become responsible for the whole amount – not just half.
If one of you don’t pay, you both have to repay the full debt, no matter which one of you spent the money.
This is called “joint liability”. 🤝
10. Borrowing from illegal lenders – loan sharks 🦈
Loan sharks are people or dodgy businesses who give illegal loans to others.
They can be really dangerous because they:
- Don’t have a licence to lend money 💳
- Make you pay lots of money to say thank you for the loan (interest – What is interest? (easy explanation) 📈 )
- Could threaten to hurt you if you don’t repay 🥊
- Might change their mind about how much you need to pay back, and increase it
- Don’t give you a lot of paperwork to keep track of what has been agreed 📜
11. Fixed contracts – gym, phone contracts, TV 🔗
When you sign up for things like:
- Mobile phone contracts 📱
- TV packages 📺
- Gym memberships 🏋️
- Internet packages 📶
You usually get tied into the contract for a certain amount of time e.g. 6 months, 12 months, 24 months. 📆
If you miss payments for your contracts, you will usually be asked to catch up. 🏃♀️💨
The company could take you to court to make you pay them, if you don’t pay them back. 👩⚖️
12. Child maintenance/alimony 👶💍
Child maintenance 🍼
These payments are agreed between parents to make sure that their children are cared for. 🥪
Sometimes in court cases the court might tell a parent that they have to pay towards child maintenance. 👩⚖️
Child maintenance is usually paid by one parent to the other, and they can be used to pay for things like food, clothes, school fees, and other costs.
It is important to pay child maintenance bills because it is a way of showing commitment to the child and the family. It’s also a way of ensuring that your children have a comfortable life.
If you don’t pay your child maintenance and get into debt, you might be taken to court and made to pay. 👩⚖️
Alimony payments 💍
If you’ve been married and have gone through a divorce, you may have to pay alimony to your previous partner. 💸
Alimony is a type of financial support that one person pays to the other after a divorce.
Alimony payments are usually awarded to the person who needs it more and is not able to provide for themselves.
It’s usually awarded in the form of monthly payments, but it can also be awarded as one lump sum payment or in other ways. 💰
It’s important to pay alimony payments because it helps maintain the standard of living for your previous partner. It also might help them pay for child care and medical costs.
So that’s it!
Different types of debt include:
- Borrowing from people you know – family, friends 👪
- Utility bills (gas, water, electricity) 💦
- Student loans 🎓
- Payday loans 💰
- House bills – rent/mortgage 🏡
- Government bills – tax e.g. council tax, income tax 🏛️
- Fines – car parking fines, court fines – criminal offences/lawsuits 👩⚖️
- “Consumer credit” – borrowing to buy stuff 🙏
- Borrowing with other people – joint debts 💞
- Borrowing from illegal lenders – loan sharks 🦈
- Fixed contracts – gym, phone contracts, TV 🔗
- Child maintenance/alimony 👶💍
Hopefully you’re feeling more confident about understanding debt.
If you know any friends or family members who might benefit from learning about debt, share this post with them!
Finally, don’t forget to check out our similar articles below!
Similar articles to “What types of debt are there?” ⬇️
for free daily Grown-Up lessons 🙌🎉