Secured vs. Unsecured Debt — What’s the Difference?
Consumer debt is broken down into two categories: secured and unsecured. You’ve probably heard those terms before, but do you know what they really mean and how they can affect your financial situation now and in the future? Read on to learn the differences between secured and unsecured debt and see some examples of each.
Secured Debt — Is just like it sounds, the money the bank (or other lender) is loaning to you is “secured” by collateral. If you don’t pay back the money as promised, the lender has the legal right to take back and sell the collateral to recover the money. The two most common types of secured debt are home mortgages and vehicle loans. In each case, if you don’t make payments, the asset can be foreclosed upon (a home), or repossessed (a vehicle). And here is something else you might not know about secured debt. If the lender takes back and sells the property without making enough to cover the full amount of the debt, they can pursue you to collect the remaining balance.
Unsecured Debt — In this case, a lender loans you money with no collateral requirement; you simply have to make a promise to repay the loan per the agreed-upon terms. Because there is no collateral to recover if you don’t pay as promised, interest rates on unsecured loans are typically higher than they are for secured loans. Additionally, if you don’t pay the money you owe, the lender can take legal action to recover the debt — including garnishing your wages. The lender will also report the delinquency to the credit bureaus, which will harm your credit score and make it more difficult, if not impossible, to borrow in the future. Some of the most common types of unsecured debt are credit cards, student loans, payday loans, court-ordered child support and medical or dental bills.
Chances are you will have varying amounts of both secured and unsecured debt at different times throughout your life. If at any point you find that your debt has become unmanageable, there are practical, sensible solutions to help you manage it. Credit Counseling is a great first step toward regaining control of your debt and creating a plan to conquer it.