Debt is a very real part of life in today’s world. Currently, U.S. consumers hold a cumulative total of over $4 trillion in debt, not including home mortgages. Although debt is a common part of our society, there’s a lot to understand about it underneath the surface.
For instance, do you know the difference between secured and unsecured debt? Knowing this difference can help you stay in better control of your finances.
What’s the Difference Between Secured and Unsecured Loans?
When you borrow money, you’re either going to be taking out a secured or an unsecured loan. If you’re unfamiliar with these terms, it’s important to know what they mean before you sign any binding contracts.
The difference between a secured and unsecured loan is most simply understood from the lender’s perspective. When they give you a secured loan, it means they have the right to take back the assets associated with that loan if you don’t pay. This isn’t the case with an unsecured loan because there’s no hard asset associated with it.
A home mortgage or auto loan are two of the most clear-cut examples of a secured loan. You’re using money from the lender to purchase an expensive asset, which they can then take back if you don’t pay. On the other hand, medical loans or credit card bills aren’t linked to any hard asset. Due to this, there’s nothing physical for the lender to foreclose or repossesses if you don’t pay them back.
Why Not Always Get an Unsecured Loan?
You’re probably thinking that getting an unsecured loan sounds a lot better than a secured one. After all, you don’t want to lose your stuff if something happens and you’re not able to pay back your debt. Unfortunately for borrowers, lenders have accounted for this in a variety of ways.
First, you generally need to have good credit in order to qualify for an unsecured loan. Lenders will be hesitant to give you money if they see you have a history of not paying it back to other people—especially if there’s not a hard asset associated with the loan. You’re also not going to be able to get as big of a loan on unsecured debt, since there’s so much more risk involved for the lender. Additionally, unsecured debt almost always comes with a higher interest rate than secured debt. This is just another way for the lender to cover their potential losses in case you don’t pay them back.
What If You Default on an Unsecured Loan?
Even though you don’t have any collateral on an unsecured loan, the lender can still act to try to get back some of their money. For example, many lenders will send your account to collections, or file a lawsuit against you. Neither of these outcomes are a good option for you, since the lender has resources to get back what they’re owed.
If you’re struggling to pay back a lot of unsecured debt—and debt collectors are calling… and calling—it might be worthwhile to explore an option like debt relief. Freedom Financial Network offers a program for debt settlement that has helped many enrollees zero out unsecured debts for much less than the original amount owed. Just make sure to do your research before signing up for any program so you fully understand the commitment you’re making.
What Happens When You Don’t Repay Your Secured Loans?
The process is typically a bit more straightforward when you default on a secured loan. You put up a certain item as collateral (often the thing that you took out the loan to obtain), and the lender will take that item if you don’t pay them. It’s also important to note that repossession will negatively affect your credit. Although, defaulting on a secured loan typically doesn’t negatively affect your credit for as long as not paying an unsecured one. Debt is a complicated concept. You should really understand what you’re getting into before taking out any loans. Whether the loan is secured or unsecured is one of the most important distinctions to know before taking on debt.