Are you planning to borrow a loan? It’s important to know that there are two major types of debts. We have the secured and unsecured debts. You need to know the implications of each type of debt. This will help you make a more informed decision.
When you borrow with collateral, be it your house, car or any asset at all, it is called a Secured Debt. Lenders place a lien on the asset, giving them the right to seize (repossess or foreclose) it if you become delinquent. If the lender takes the asset, it will be sold (often at an auction). If the selling price for the asset does not cover the entire debt, the lender may still come after you for the difference: the deficiency balance.
A mortgage and auto loan are both examples of secured debt. Your mortgage loan is secured by your home. Similarly, your auto loan is secured by your vehicle. If you become delinquent on these loan payments, the lender can foreclose or repossess the the house or vehicle as the case may be. A title loan is also a type of secured debt because the debt is secured with title to a vehicle or other asset.
You never fully own the asset tied to secured debt until the loan is paid off. At that point, you can ask the lender to release the asset and give you a title that’s free of any liens.
Unsecured Debt is exactly the opposite of secured debts. Here, no collateral is required. Thus, if you fall behind on your payments, they generally cannot claim your assets for the debt.
While they can’t claim your assets as repayment for your debt, the lender may take other actions to get you to pay what you owe. They can decide to hire a debt collector to coax you to pay the debt. If that doesn’t work, the lender may sue you and ask the court to garnish your wages, take an asset, or put a lien on your assets until you’ve paid your debt. They have the right to report the delinquent payment status to the credit bureaus to be reflected on your credit report. Consequently, lenders of secured debts take these actions, too.
Credit card debt is the most widely-held unsecured debt. Other unsecured debts include student loans, payday loans, medical bills, and court-ordered child support.
Prioritizing Secured and Unsecured Debts
Emergency situations arise from time to time that you cannot handle on your own. At the point you decide to go for a loan, make sure you’re aware of all the terms and conditions. Don’t make a blind decision as this can lead to loss of essential assets if you fall behind on payments (for secured debts).
You might give more priority to unsecured debts if you’re making extra payments to pay off some debt. Unsecured debts sometimes have higher interest rates, which can take longer to pay off and results in higher amounts paid. Even when you’re in debt repayment mode, it’s important to keep up the minimum and installment payments on all your accounts.