Secured vs. unsecured debts - what are the differences between these two?
Before you apply for a car loan or a credit card, you should know first what debts are. Debts come in two forms – secured and unsecured. There's a big difference between secured and unsecured debt that borrowers should be aware of before applying for either one.
Comparison between secured and unsecured debt
A secured debt is a loan secured by a piece of asset or property. The most common types include car loans and mortgages on housing. In secured debt, lenders can take back properties or assets secured by a debt if the borrowers are unable to make payments for their loans or mortgages. Through legal processes, the lenders can file for a foreclosure, or take real estate properties. They can also seek help from a "repo-man" to go repossess the borrower's vehicle in the event of an auto loan default.
With unsecured debt, on the other hand, there's no property, asset or collateral attached to the debt. This means that the lenders have no right to actually take any of the borrower's properties or file for a home foreclosure, in case non-payment. Because no properties tied are to the debt, unsecured debt creates fewer long-term problems and less stress for borrowers than with secured debt. The only drawback of unsecured debt is its high interest rates charged to the borrower's monthly payments. Types of unsecured debt include credit card debts and personal loans.
Credit card debts and personal loans
One of the most common unsecured debts that one can incur is the credit card debt. This debt usually takes shape when credit card holders can purchase products and goods immediately and pay them later. The line of credit is revolving, so borrowers can borrow on a monthly basis, while the balances carry over for the succeeding months. If possible, borrowers should make more than the minimum payment every month if they intend to get out of debt faster. By doing so, they can also save money for the high interest rates charged by the card company.
Personal loans, on the other hand, are loans used for activities such as business expansions, renovation of an old house, medical emergencies and the like, in case the borrower runs short of money. It is often chosen over credit cards, in terms of paying medical bills or buying materials for home renovation, because of its lower interests, which means they are more appealing to borrowers. However, lenders carefully review the record of the borrower; a spotless credit means lower interests and easy loan application, but a damaged credit means less chances of getting accepted and outstanding interests.
Always prioritize debt payments
Now that you have an idea of how secured and unsecured debts work, you can prioritize and settle your loans properly. Secured debts ideally should be settled first because of the risks associated if borrowers are unable to make payments, which may then cause borrowers to incur unsecured debts.
For example: Paying for a car loan is more important than securing your credit card bills, because once you defaulted with the loan, your vehicle can be taken back by lending companies. Your remaining funds for the month can then be used to pay for your credit card balances.
Nobody wants to end up in financially compromised situation in the future. Always prioritize how you pay your debts, whether they are secured or unsecured.
Comparison between secured and unsecured debt
A secured debt is a loan secured by a piece of asset or property. The most common types include car loans and mortgages on housing. In secured debt, lenders can take back properties or assets secured by a debt if the borrowers are unable to make payments for their loans or mortgages. Through legal processes, the lenders can file for a foreclosure, or take real estate properties. They can also seek help from a "repo-man" to go repossess the borrower's vehicle in the event of an auto loan default.
With unsecured debt, on the other hand, there's no property, asset or collateral attached to the debt. This means that the lenders have no right to actually take any of the borrower's properties or file for a home foreclosure, in case non-payment. Because no properties tied are to the debt, unsecured debt creates fewer long-term problems and less stress for borrowers than with secured debt. The only drawback of unsecured debt is its high interest rates charged to the borrower's monthly payments. Types of unsecured debt include credit card debts and personal loans.
Credit card debts and personal loans
One of the most common unsecured debts that one can incur is the credit card debt. This debt usually takes shape when credit card holders can purchase products and goods immediately and pay them later. The line of credit is revolving, so borrowers can borrow on a monthly basis, while the balances carry over for the succeeding months. If possible, borrowers should make more than the minimum payment every month if they intend to get out of debt faster. By doing so, they can also save money for the high interest rates charged by the card company.
Personal loans, on the other hand, are loans used for activities such as business expansions, renovation of an old house, medical emergencies and the like, in case the borrower runs short of money. It is often chosen over credit cards, in terms of paying medical bills or buying materials for home renovation, because of its lower interests, which means they are more appealing to borrowers. However, lenders carefully review the record of the borrower; a spotless credit means lower interests and easy loan application, but a damaged credit means less chances of getting accepted and outstanding interests.
Always prioritize debt payments
Now that you have an idea of how secured and unsecured debts work, you can prioritize and settle your loans properly. Secured debts ideally should be settled first because of the risks associated if borrowers are unable to make payments, which may then cause borrowers to incur unsecured debts.
For example: Paying for a car loan is more important than securing your credit card bills, because once you defaulted with the loan, your vehicle can be taken back by lending companies. Your remaining funds for the month can then be used to pay for your credit card balances.
Nobody wants to end up in financially compromised situation in the future. Always prioritize how you pay your debts, whether they are secured or unsecured.
