Secured and unsecured are the two main kinds of debt that you can meet in your daily life. An excellent example of a secured debt is a house mortgage, while unsecured debt is the credit card you carry in your wallet.
Both options have advantages and disadvantages, which need to be discussed and studied before applying for either.
The Main Features of Secured Debt
Secured debt is mainly used for larger sums as collateral for a loan. The collateral ensures that the lender can if needed, seize the collateral in case you are very late on payments according to the terms and conditions of your loan.
Sometimes the collateral is insufficient to cover the entire debt; in these cases, the lender could reach out to the court to proceed with wanting another payment to justify the difference. Secured debt could also be used as collateral for less pricey possessions like a car.
Tips On Handling Secured Debt
Much like any other form of debt, the most important thing to keeping a healthy credit history is to pay the loan on time and at least the minimum amount each time. Other essential things that might differ are:
- Inform your lender if you are going to be late beforehand.
- If you are struggling too much, request a meeting with the lender to discuss other conditions.
- If you are behind on payments and payment amounts, and you feel like the lender is about to repossess your property or car, you could sell it and give the loan back. By doing so, you will save your credit history.
Pros and Cons of Secured Debt
When handled correctly, secured debt could bring many positives in your life, like a new home. However, if uneducated decisions are made, it could lead to losing the purchased item. There are other pros and cons like:
- You can get a much higher amount of money than with unsecured debt because the lender has collateral.
- A lower interest rate on the loan can be achieved because there is less risk for the bank.
- Some people with secured loans can qualify for an annual tax deduction with interest paid.
- If you are living in the mortgaged property and lose it due to late payments, you could end up in need to search for another place to live in.
- With secured loans, you are usually using the purchased item as collateral.
The Main Features of Unsecured Debt
Unsecured debt doesn’t block any item or possession as collateral; you could take an unsecured loan for various purchases. It is usually based on your creditworthiness. The most common unsecured loans are credit cards, student loans, personal loans, or medical bills.
And although the lender cannot seize any property if you are late on your payments with unsecured debt, they can always sell your debt to a collector or turn to a major bureau for help and bring things to court.
- With secured debt, you don’t need to have anything to use as collateral. For example, you cannot use your education as collateral, but you could take out a student loan.
- The creditor won’t be able to seize anything from you quickly if you fail to pay, and legal actions would need to be taken.
- Applications for unsecured loans are much quicker than for secured ones.
- There are higher interest rates when paying off an unsecured loan than a secured one.
- Without a credit history, applying for an unsecured loan is much harder as it poses a greater risk to the lender.
Subtypes of Loans
There are two subtypes of debt called revolving and installment debt. Each of these could be either secured or unsecured and differ mainly with the type of payments required. For example, an installment debt gives you a large sum of money all at once, and you could pay it back in two, three big payments, or a few smaller ones, depending on the conditions you agreed upon with the lender. Installment loans could be paid off in just a few months or in a longer period, like 10 or 20 years.
On the other hand, with revolving debt like credit cards or HELOCs (home equity lines of credit), you have an infinite period in which you are borrowing and repaying the money within certain terms you’ve agreed upon at the start of taking the credit.
Regardless of the type of loan you decide to take, always thoroughly research the differences between the different kinds. Paying the right amount on time is crucial to keeping a healthy credit history. Some debts don’t require proof of previous successfully paid credits, while others do.