The Differences Between Secured And Unsecured Debt
It’s easy to just think that debt is just debt, but in reality, there are different types of loans, and it’s important to know what which type you have. You will need to understand the differences in order to be a good money manager, or, if the worse happens and you find yourself turning to credit or debt counseling, you’ll need to understand how different types of debt can be handled. For the purposes of this article, let’s take a look at two types of debt; secured and unsecured loans.
Secured debt is a loan that has something attached of value attached to it—this is called collateral. The most common examples are car loans and mortgages. Collateral can be cash or the item (or items) that you borrowed in order to get. (For example, your car.) With secured debt, if you fall behind on your payments, the collateral can be repossessed and the lender will sell it in order to collect the money that they are owed. But that doesn’t always put you in the clear, in reality, even if the collateral has been repossessed or foreclosed on and sold, you may still remain liable for any balance remaining until the entire amount of the loan is paid off. Additionally, with secured debt you cannot negotiate payments or any restructuring through credit counseling, and oftentimes you won’t be able to discharge the debt by filing for bankruptcy.
On the other hand, unsecured debts act totally different. Most people associate unsecured debt with a credit card or a personal loan without collateral. But it can also be a commercial debt or a medical debt. Essentially, this type of loan is structured around a good credit history and a personal promise to re-pay the loan. There is no collateral on this type of debt, and the creditor has no assurance – other than your agreement to repay on pre-determined terms – that they will get paid. If you fall behind on one of these debts, a lender can send your account into collections and take legal action. More often, they will attempt to try and work out a reasonable debt settlement. These debts and loans can be discharged, or restructured in bankruptcy or through credit counseling. Because of the lender’s risk factor, you will generally pay a higher interest rate on these types of loans.
Most people have a mixture of both secured and unsecured debts, and both should be managed with the utmost care and concern. Many times, someone just starting to build their credit history will have to prove themselves with a few, small unsecured debt loans and re-payments in order to qualify to buy a home or a car (secured debt). But overall, the most important thing is to treat each one as it is; a potential good mark that will improve your credit rating.
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