What Is Personal Debt?

Credit cards are convenient, but they're also a leading source of personal debt.

Debt is a recognized major problem within the United States as of 2011—most people have at least one credit card, and the debt problem only worsens in periods of economic recession. However, two types of debt exist. These are personal debt and business debt. Because laws make distinctions between these two types of debt for the purposes of collections and bankruptcy, it makes financial sense to know the definition of personal debt.



Personal debt is debt owed for which you personally are legally responsible. Personal debt may involve more than one party, such as if you and your spouse take out a loan together for a car, so in this sense, "personal" really just means "non-business." Personal debt also can be secured or unsecured. Secured debt is debt acquired by putting up some form of collateral. Unsecured debt relies solely on your promise to pay. Personal debt always funds consumption rather than investment.


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Biggest Sources of Personal Debt

Although there are a plethora of personal debt types, only a few types account for the majority of personal debt. According to Paul Toscano of CNBC, as of 2009, payday advances and small-business loans (some people agree to be personally liable for businesses financially) account for $40 billion and $68 billion in personal debt, respectively. Farm loans come next at $114.2 billion. Auto loans account for $313.8 billion, while IRS tax debt accounts for $345 billion. The amount of personal debt from student loans is $556 billion. Revolving home-equity credit accounts for $577.8 billion, while revolving consumer credit (like credit cards) makes up $953.1 billion. The largest amount of personal debt by far is wrapped up in mortgages. Residential mortgages make up $14.64 trillion—yes, trillion—in personal debt.


Causes of Personal Debt

People get into personal debt sometimes because of life circumstances, such as job loss or unexpected medical bills. Pay rates also don't always cover the cost of living, even when employees work full time. Some people acquire debt because they lack the organizational and financial skills to manage and stick to a budget. People often need items before they have earned enough to pay for the item outright—education costs are one example. Last, people often acquire personal debt because they have a compulsion to buy, or because they do not understand the true difference between a "want" and a "need."


Consequences of Personal Debt

When you acquire personal debt, the amount of disposable income you have decreases. Sometimes, depending on whether you fail to meet the terms of your credit agreements, your credit score suffers. This sometimes makes it harder to acquire funding in the future. Personal debt also causes enormous stress for many people, with many people overwhelmed by collections agencies. Lastly, personal debt has the potential to decrease what you can give to your heirs or surviving spouse, depending on what you owe and the state in which you live.


Ways to Eliminate Debt

The best way to eliminate personal debt is simply to develop a realistic budget and engage in expense tracking. Most financial experts advise you to tackle the debt with the highest rate of interest first, throwing everything you can at that debt and paying at least minimum payments on the rest. However, you also can use debt consolidation, refinancing, debt negotiation, debt settlement and bankruptcy to get a fresh start or get your debt to a manageable level. These methods either forgive some of your debt or give you new interest rates and monthly payment amounts.