There are two main types of debt: secured debt and unsecured debt. One is effectively secured by your assets: the creditor can seize and sell them if you default and stop paying the loan. An unsecured creditor has less of a safety net.
What is the difference between secured and unsecured debt?
Secured debt:
The creditor holds a lien on your property so they can take foreclosure or repossession actions to settle the debt if you don’t repay. The creditor is limited to suing you in court or transferring the debt to a collection agency if you don’t make payments. You may lose the property that acts as collateral. You might pay a higher interest rate because the debt is unsecured.
Unsecured debt:
Creditors of unsecured debt do not have rights to any collateral. Generally, they cannot claim your assets to repay the debt if you default unless they sue you and obtain a judgment against you in court. The judgment acts as a form of lien in this case. However, the unsecured creditor has no other options. They can employ a variety of other procedures to force you to repay the debt. They may hire a collection agency to pursue you and try to pressure you into repaying the debt. A successful lawsuit can result in garnishing your wages, seizing an uncollateralized asset, or placing a lien on your assets until you pay the debt. This ensures that the creditor will be paid when you sell them.
Both secured and unsecured creditors will also report late payment status to credit bureaus. Late payments will show up on your credit report and affect your credit score.
Examples of secured debt
Mortgages and auto loans are examples of secured debt. A mortgage loan is secured by your home. Similarly, an auto loan is secured by your vehicle. The creditor can seize the property if you are late on these loan payments.
Examples of unsecured debt
Credit card debt is the most common type of unsecured debt. Other types of unsecured debt include student loans, payday loans, medical bills, and court-ordered support.
Conclusion
It is important to keep minimum payments and installments on all your accounts, but there may be times when you have the least amount available to do so. Secured debt is usually the best option to pay first if you’re cash constrained and facing the tough decision of paying only some of your bills. It is often hard to catch up on those payments and you risk losing essential assets if you default. You may prioritize unsecured debt if you are making extra payments to eliminate some debts. Unsecured debt often carries higher interest rates, so it may take longer to pay off. This can lead to paying more overall because interest continues to accrue monthly.
Source: https://www.thebalancemoney.com/the-difference-between-secured-and-unsecured-debts-960181
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