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A Layman’s Guide to Secured vs. Unsecured Debt

Being an adult isn’t all it’s cracked up to be. Day to day you head to work only to exert yourself and pay bills that leave you little for yourself. The average American has about $90,000 of debt. Getting out of debt, especially when it is extreme, is difficult, but if you play your cards right it is not impossible.

You are more likely to be in financial control when you understand the type of debt you are in when you want to escape. When you are in debt, you likely have one of the two primary types, if not both. Do you understand what secured vs unsecured debt is? If not, let this be the guide to inform you about the differences, and how you can best approach each.

Secured Debt

When you have secured debt, it is backed up with an asset such as your car or house. These possessions are what you offer as collateral to your lender when borrowing money.

Because you let them hold something of value to you, the money they give you is less of a loss for them because they now have a lien on something that belongs to you.

This is why the debt is secure (for the lender). In the event you are unable to pay the lender back, they have the full right to seize your assets.

As the borrower, having your car repossessed or have a lien on your home is a bad situation. Once you sign a secured debt, the asset you put on the table is no longer yours until you can repay the loan.

Advantages of Secured Debt

When you need to borrow money, and your credit score is not the best, lenders are less likely to approve giving you a loan. If you have valuable possessions, you can get the money you need by offering an asset to the lender.

When you are certain you can repay the debt back, this is a great move when you are stuck and have a hard time getting a loan the traditional way. Paying the secured debt back also improves your credit score and will help you get back on track.

In many cases, because you offer an asset to a lender, they may also be willing to reduce the interest rate on a loan. Secured debt can be good so long as you understand the risks and know how to avoid those risks.

Examples Of Secured Debt

When you want to know if a debt is secured, you should think if you must provide an item of value to get the loan. There are three main things you can offer on secured debt.

  • Your Home: If you do not pay it back, the lender has a right to foreclose and sell your property
  • Your Car: The lender can repossess your vehicle
  • Secured Credit Cards: You offer your own money as a deposit and the lender keeps it if you don’t pay back

You can also give valuable items if you need money at a pawn shop. You can get money from pawn shops with boats, jewelry, or other valuables.

Unsecured Debt

When you get unsecured debt, you are not giving your lenders anything of value in return as collateral. The good thing is if you can’t repay the debt, lenders usually cannot claim any of your assets.

Instead, they will use other methods to collect money owed. They will attempt to find repayment plan solutions with you first. If a debt goes into default, debt collectors may contact you often to pay the debt.

A final attempt these lenders may do to collect money is to sue you in court to pay up or garnish your wages or bank account. Unsecured debt affects your credit score the worst when you do not pay it back.

Advantages Of Unsecured Debt

Unsecured debt is preferred by many because they do not have to give anything to the lender to get money. They also give you better flexibility options over a secure debt.

For example, when you are unable to repay a loan as agreed in the contract, lenders are more flexible to help you. They may reduce the money you owe and settle the debt or they will stretch out the payment plans over a longer period of time so you can pay it back.

Examples of Unsecured Debt

There are four main types of unsecured debt you can apply for. When you are applying for an unsecured loan, you either qualify for it or you don’t based on your credit score.

  • Personal Loans: You can get a personal loan when you are low on money from banks and lending services without requiring an asset in return
  • School Loans: When you are a student, you are most likely to get a direct subsidized or direct subsidized loan on low-interest
  • Medical Bills: Hospital bills you do not pay back may appear on your credit score as a debt you owe
  • Credit cards: The most common type of unsecured debt people have that reflect poorly on their credit score when you don’t repay it

Although there is a higher urgency to pay back secured credit, you want to pay unsecured credit back the soonest possible.

Separating Secured vs Unsecured Debt

When you are in debt, you are more likely to get out of it when you understand more about the type you are in. Secured vs unsecured debt have their differences and advantages when you need them. When you take out debt without knowing the full implications, you may struggle to pay it off longer than you would like.

Not all debt is bad. At times, debt may help you out to get you the house you always wanted or it will allow you to go to school or get money when you need it.

Still, all debt has the potential to turn bad if you let the interest accumulate. Knowing the differences in the type of debt you have puts you in a better position paying it back.

If you found this article helpful and would like to educate yourself more on topics like this, check out more blogs on our website in the financial section.

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