Unsecured and Secured Debts: How They Differ

You might already know that there are two types of loans ― unsecured and secured debt. It is essential to understand that unsecured and secured debts have different terms and interest rates. Moreover, knowing the difference between the two is imperative when you plan to borrow money and prioritize your debt repayments.

See also: 9 Things You Should Consider Before Getting a Loan

Unsecured Debts

Unsecured loans are very common types of loans that don’t require any collateral. If you default on your unsecured loan, the lender will have no property to seize or repossess to recoup its losses.

On the other hand, since there is no collateral needed, unsecured debts tend to carry higher interest rates than secured loans, as they are riskier on the lender’s part. 

Forms of Unsecured Debts

The different forms of unsecured debt are as follows.

Credit Cards

With most credit cards, you can charge almost anything you want. The lender can’t come to your home and take the items you bought using the card if you fail to pay back the bills.

Most Personal Loans

In the case of personal loans, it is vital to know that the lender has no security interest on the assets you purchased using the loan amount. It means that the lender has no right to seize the items you bought with the loan amount if you fail to make repayments.

Medical Debts

When it comes to medical debts, your healthcare provider cannot take away the healthcare services you have received if you fail to pay.

Secured Debts

Secured debt is a form of debt backed by property such as a home or a car. If you fail to make repayments, the lender might repossess the property or asset you have put up as collateral.

Furthermore, the lender usually does this instead of opening a debt collection or suing you for failure to make repayments.

Forms of Secured Debts

The various forms of secured debt are as follows

Mortgages

Your home generally secures mortgages. This means that your house will serve as collateral. Not only that, but if you fail to repay the loan, the lender can foreclose and sell your home.

Car Loans

Your car serves as collateral for the Car loan. It means, if you fail to pay back the loan, the lender can repossess the car and sell it.

Secured Credit Cards 

Most of the time, secured credit cards require you to deposit an equal amount as your credit limit. If you didn’t pay the bill, the lender could keep the money you have deposited in your account.

With secured debts, you can benefit from getting better interest rates, as this type of debt is less risky on the lender’s part. If you fail to repay the debt, the lender can quickly repossess your property and sell it to recoup the losses of non-repayment.

See also: Why Millennials Should Know Basic Finance

Lenders also tend to be more flexible in loan terms for secured debts, as the loan is guaranteed or backed up by collateral. It is essential to know that one of the most common types of secured debt is consensual loans.

Under consensual loans, you as a borrower agree to pledge your property as collateral. However, there are many types of non-consensual loans. It includes money judgment a creditor may file against you or a tax lien put down against your property for not paying state, federal, or local taxes.

Which One Should You Prioritize?

While paying off your debts, it is recommended to prioritize the loans with high-interest rates. Start by evaluating your secured or unsecured debts and look for the ones with the highest interest rate. This way, you can save yourself some extra cash in accumulating interest.

It is vital to know that there is an added benefit of having a lower credit utilization ratio. It helps you boost your credit score faster. It is known as the avalanche method. When you pay back high-interest debts, you have more budget to pay off debts with lower interest rates. Sooner or later, you will become debt-free.

You can also choose to file bankruptcy. It can be an excellent option to help solve your unsecured debts, depending on the circumstances. 

Bankruptcy can erase your legal responsibility to pay back your debts. However, it will have a negative impact on your credit score and your chance to take out a loan in the future.

If you had to choose which type of debt to prioritize, it would be best to pay back your secured debt first as soon as possible. This is because you are at risk of losing your property. If you fail to pay back the loan, the government can seize your property. Not only that, but you can also be responsible for additional debts if repossession fails to cover the whole amount of your secured debt.

In a Nutshell

Loans and other financing options available to borrowers generally fall under two types: unsecured and secured debts. The primary difference between these two is the requirement or non-requirement of collateral. It means the asset you own backs the debt and works as a security to the lender in case you fail to pay back the loan in full.

We really hope that this write-up was helpful in clearing your doubts on unsecured and secured loans. Feel free to surf through our website to learn more about finance and loans. Don’t forget to leave us your feedbacks which will help us to improve!

See also: 6 Reasons To Consider Gold As An Investment