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Secured Debt and Unsecured Debt – The Differences
There are differences between secured debt and unsecured debt. What are they and why does it matter?
Primarily secured debt and unsecured debt come into play when you borrow money. They are loans. You need money for something and you borrow the money under certain conditions.
Secured Debt or Loan
Secured loans are loans that are backed by an asset, like a house in the case of a mortgage loan or a car with an auto loan. This piece of property is collateral for the loan. When you agree to the loan, you agree that the lender can repossess the collateral if you don’t repay the loan as agreed.
Unsecured Debt or Loan
Unsecured loans are loans that are not directly connected to an asset. The lender can NOT automatically seize your property as payment for the loan. Often, unsecured loans have higher interest rates and fees in an attempt to accrue funds over time in exchange for a higher risk loan.
Sometimes you can be declined for an unsecured loan or line of credit and your only option would then be to locate a secured loan opportunity. On the other hand with a secured loan, because you are offering collateral, you may be approved for larger loan amount. Take caution not to over extend your ability to pay back the loan, regardless of what you can be approved for. Most lenders can and do report late payments and loan default to the credit bureaus with both secured loans and unsecured loans.
Time involved in paying back debts and loans
If you are in a situation where your secured debt or unsecured debt are beyond your means you may want to consider bankruptcy. A bankruptcy attorney can advise you of options you need to consider.