The Main Difference Between Secured and Unsecured Debt

The Main Difference Between Secured and Unsecured Debt

Many of us want to do better with our finances. This is especially true in the days of a shaky economy and an unstable economy. One way someone can improve their financial picture is to learn as much as they can about the different types of debt one can incur throughout their lives. Two examples that one would do well to know about are secured and unsecured debt. This article will tell you all about them, as well as give you tips on how to handle each type of financial obligation.

Secured and Unsecured Debt

Secured debt is a type of financial obligation in which collateral is involved. In order to take on secured debt, you must put up a piece of personal property as collateral. Examples of collateral include your house, your personal vehicles and any other type of property deemed valuable by the lending agency.

Secured debt usually has lower interest rates and payments. That’s because the lending agency has the right to recover the collateral you originally put up as part of the agreement if you don’t pay. In other words, your car or house can be taken away from you if you stop making payments for any reason.

Unlike secured debt, you do not have to put up any personal property as collateral for unsecured debt. With this type of debt, all the lending agency has to go on is your promise to pay. If you don’t pay, the lending agency is not allowed to take away any personal property. Popular examples of secured debt are student loans and credit cards.

If you fail to make payments on unsecured debts, the lending agencies have a few avenues they can take. More often than not, they’ll report your account to collection and credit reporting agencies. The efforts from collection agencies will include letters and phone exhortations to pay off your debt. The negative mark on your credit report may give you problems if you plan on applying for loans in the future.

Debts and Your Credit

Being able to successfully handle all of your debt is an important part of being a financially responsible adult. This is because 10% of your credit score is based on your unique ability to handle both secured and unsecured debts. The more types of loans you have taken out and are paying on time, the better your credit score will be.

The first type of debt you should pay attention to are revolving, or secured, debts. They are called revolving debts because the interest rates and the payment amount will change, or revolve, according to economic conditions and your overall payment history.

The second type is an installment, or unsecured, debts. They are called installments debts because the loan is structured so that each payment is the exact same amount and doesn’t change according to external conditions. With installment loans, the interest rates are usually a bit higher due to the fact that collateral is not involved.

Handling Secured and Unsecured Debt

Whether you take out an unsecured or secured loan, you need to know how to structure your financial budget so that you’re not overextending yourself when paying off these debts. With secured loans, strict budgeting is extremely important as your personal property will be at stake if you stop payments.

The same advice would be pertinent to those who have taken out unsecured loans. Even though your car or house can’t be taken away if you can’t pay, a negative mark on your credit report can affect your ability to take out additional loans and can even extend to trouble renting an apartment or getting a job.

When taking out any type of loan, you’ll have to prepare for the unexpected. While paying off a loan can be easy if you’re employed, the requirement to make payments will not go away if you find yourself with a pink slip. Have some money put aside so that you can make loan payments for a couple of months if the unthinkable happens?

Paying off debt doesn’t have to be an onerous responsibility. As long as you know how to prepare yourself for both good times and bad, taking care of your financial responsibilities can be one more thing you have learned to juggle in your busy life.

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Beth Greene
Beth Greene