If you’re feeling overwhelmed by credit cards, personal loans or medical bills, you’re not alone — and you’re not without options.
TL;DR:
In this guide, we’ll break down the most common debt types, explain their risk and help you figure out which debt relief options can actually help.
Common Debt Types, Risk Factors and Relief Options
| Debt Source | Debt Type | Collateral | Amount Per Borrower | Risk Level | Debt Relief Options |
|---|---|---|---|---|---|
| Payday Loans | Lump Sum | Unsecured | $375 average (CFPB) |
Very High |
|
| Student Loans | Installment | Unsecured | $38,375 (Education Data Initiative) |
High |
|
| Personal Loans | Installment | Unsecured | $10,426 average (TransUnion Q1 2024) |
High |
|
| Credit Card | Revolving | Unsecured | $6,730 average (Experian Q3 2024) |
High |
|
| Medical Bills | Installment | Unsecured | ~$3,710 average (KFF, 2022 est.) |
Medium |
|
| Buy Now Pay Later | Installment | Unsecured | $135 average loan $2,085 cumulative average of all BNPL loans (CapitalOne) |
Medium |
|
| Auto Loans (Used Cars) | Installment | Secured | $26,073 average (Experian Q1 2024) |
Medium |
|
| Auto Loans (New Cars) | Installment | Secured | $40,634 average (Experian Q1 2024) |
Medium |
|
| Mortgage | Installment | Secured | $252,505 average (Experian 2024) |
Low |
|
Understanding Common Types of Debt (and Their Risks)
Not all debt is created equal. Some debts carry more risk to your financial stability than others. When we assess risk level, we’re essentially looking at a debt’s potential to become unmanageable for you, the borrower.
Here’s what goes into determining a debt’s risk:
High Interest Rates (APRs): Higher rates mean more of your payment goes to interest, making it harder to pay down the principal and extending your repayment time.
Burdensome Monthly Payments: Large payments strain your budget, increasing the chance you’ll fall behind or have to take on more debt if unexpected costs pop up.
Severity of Consequences: What happens if you fall behind on payments or can’t pay?
- Secured Debts (like auto loans, mortgages) can lead to repossession or foreclosure, meaning you could lose your property.
- Unsecured Debts (like credit cards, personal loans) can severely damage your credit, lead to collections and even lawsuits.
Debt Structure: The terms and conditions of a debt significantly impact how it’s managed, repaid and the potential challenges it presents.
- Revolving Debts (credit cards) can grow indefinitely with variable rates, often keeping you in a cycle of minimum payments.
- Lump Sum Debts (payday loans) demand one large, often difficult payment, making re-borrowing common.
Ultimately, It’s not just about how much you owe, but how easily that debt can spiral out of control, leading to financial stress, missed payments and serious consequences.
Debt Risk Levels at a Glance
| Risk Level | Type of Debt | Key Risk Factors |
|---|---|---|
| Very High | Payday Loans | Extremely high-interest rates, short repayments terms and penalty fees that can trap borrowers in a debt cycle. |
| High | Credit Card Debt | Revolving, high-interest balances that grow fast with minimum payments; can damage credit. |
| High | Student Loans | Unsecured debt, large balances can be unmanageable with modest income; limited discharge options. |
| High | Personal Loans | Often unsecured; missed payments can quickly lead to collections and credit damage. |
| Medium | Medical Debt | Usually unexpected and unsecured; can impact credit if not addressed before collections. |
| Medium | Buy Now, Pay Later (BNPL) | Easy to accrue multiple, overlapping debts; minimum payments can add up and missed payments can hurt credit. |
| Medium | Auto Loans | Secured by the vehicle, risking repossession if payments are missed; deficiency balance is a concern. |
| Low | Mortgages | Secured by your property; missed payments risk foreclosure, and rising property taxes and insurance can increase monthly costs unexpectedly, but this type of debt is generally stable. |
Now that you’ve got a clearer picture of which debts are weighing you down, let’s explore your debt relief options. We’ll cover how each one works, who it’s best for and any potential risks.
Debt Relief Options Explained and Ranked
Each method offers a unique approach, with different benefits, risks and suitability depending on your individual circumstances. Below, we’ve ranked these options based on their typical effectiveness and broad impact, aiming to provide a clear overview to help you consider your path forward.
#1 Debt Consolidation Options
Debt consolidation options combine multiple debts into a single, often more manageable, monthly payment.
Depending on the specific option, it can offer benefits such as a lower interest rate, a reduced monthly payment, a shorter repayment term or the potential to pay less overall. While no single option guarantees all these benefits simultaneously, you can often tailor a solution to your unique needs.
Through Consolidation Loans or Balance Transfers: This involves combining existing high-interest debts, such as credit card balances, into a new financial product like a personal loan, balance transfer credit card or home equity loan. These options can simplify payments, potentially lower interest rates and establish a fixed repayment term.
- Best for: Individuals with high-interest debt and good credit.
- Risks: Payments might still be unaffordable or a longer term could lead to paying more interest over time.
Through Debt Resolution: This involves working directly with creditors or hiring a company to negotiate on your behalf to reduce the total balance owed. The goal is to lower monthly payments, often with a fixed repayment term.
- Best for: Lowering payments, easing financial hardship and delinquent accounts.
- Risks: Can negatively impact credit and there may be potential tax consequences.
#2 Refinance
Refinancing replaces an existing loan with a new one, often to secure better terms like a lower interest rate, a different repayment schedule or to access equity. This category also includes options like a cash-out refinance (replacing your mortgage with a larger one to get cash) or a second mortgage (an additional loan using home equity).
- Best for: Secured debt where you ask for more favorable terms or access equity.
- Risks: May increase the total interest paid over the life of the loan, especially if the new term is longer; potential for fees associated with the new loan.
#3 Debt Management Plans (DMP)
A non-profit credit counseling agency works with your unsecured creditors (e.g., credit card companies) to negotiate lower interest rates and consolidate your payments.
- Best for: Simplifying payments without taking out a new loan.
- Risks: Not all debts are eligible, requires consistent, on-time payments and typically results in the closure of credit card accounts.
#4 Income-Driven Repayment (IDR) Plans
Plans that adjust your monthly payment based on your income and family size. After a set number of years (typically 20 or 25) any remaining loan balance may be forgiven. Eligibility is recertified annually.
- Best for: Individuals with high federal student loan balances and modest incomes.
- Risks: Can result in longer repayment periods and your loan balance may grow if your payments don’t cover the accruing interest.
#5 Forgiveness
Legally erases all or part of a debt based on specific qualifications, typically for federal student loans or medical debt and may be contingent on public service, income or financial hardship.
- Best for: Federal student loans, certain medical debts and individuals experiencing significant financial hardship.
- Risks: Often involves lengthy approval timelines and strict eligibility criteria.
#6 Payment Plans
Payment plans involve working directly with creditors to modify repayment terms, typically by extending the repayment period to make monthly payments more affordable.
- Best for: Managing medical bills or other one-time, unexpected expenses.
- Risks: Missed payments might nullify the agreement, potentially making your financial situation worse.
#7 Repayment Strategies
These strategies involve making minimum payments on all debts while using any extra funds to pay down specific accounts more aggressively based on a chosen method.
Through the Snowball Method: Repay the smallest balances first to gain momentum.
- Best for: Quick wins and visible progress to keep you focused and motivated.
- Risks: You might pay more in interest over time compared to the avalanche method.
Through the Avalanche Method: Repay debts with the highest interest rates first to stop interest from growing the balance over time.
- Best for: Saving money on interest in the long run; is a mathematically efficient method.
- Risks: It can be less motivating in the short since it might take longer to pay off your first balance completely.
#8 Forbearance
Forbearance is a temporary pause or reduction in loan payments granted by the lender, typically during periods of financial hardship. Terms vary by lender and are at their discretion.
- Best for: Short-term financial hardships where you anticipate being able to resume full payments soon.
- Risks: While generally low risk, interest usually continues to accrue during forbearance, which can increase your total debt and extend your repayment timeline.
#9 Bankruptcy
A legal proceeding that allows individuals to restructure or discharge their debts under court protection when they are unable to pay.
- Best for: People with severe financial hardship or total insolvency.
- Risks: Has a major and long-lasting impact on your credit report (7-10 years); may require the liquidation of assets (Chapter 7) or a court-managed repayment plan (Chapter 13); missing payments during a Chapter 13 plan can cause your case to be dismissed.
Choosing the Right Path Forward
There’s no one-size-fits-all solution to getting out of debt. That’s why understanding debt types, risk levels and relief options is so important. Whether you’re dealing with credit cards, medical bills, payday loans or student debt, the key is to choose a strategy that aligns with your financial situation, timeline and goals.
For some, that might mean debt consolidation to simplify monthly payments. For others, it may involve negotiation, forgiveness programs or a combination of approaches. If you’re feeling unsure, connecting with a reputable debt relief provider can help you evaluate your options and build a plan that works.
