Unsecured debt and secured debt – what’s the difference?
When it comes to debt and financial borrowing there are two main categories: secured debt and unsecured debt. Knowing the difference is important for anyone wanting to borrow money. It will provide you with a better financial understanding and will help you prioritise your debts during payoff, and ensure you keep your assets. It will also allow you to make more informed choices if you need to take out any loans in the future.
This type of debt is referred to as ‘secured’ because it is usually tied to the borrower’s assets. These assets are collateral for the lender – therefore, should the borrower fall behind on payments, the lender has the right to take ownership of the assets. If the financial worth of the assets matches or beats the debt value, it will be considered cleared, but if it less than the debt owed, you may be pursued to cover the difference.
Secured loans are less risky for lenders, which usually results in them having lower interest rates and being cheaper than unsecured loans.
A mortgage is an example of secured debt – if you are unable to keep up with re-payments, your home will be reprocessed by the lender.
Unsecured debt is more straightforward. It isn’t tied to any collateral. You borrow a certain amount of money from a lender and agree to regular repayments until the loan is paid back.
Because the loan isn’t secured against any of your assets the interest rates tend to by higher as it is considered more of a risk. Missing repayments usually results in additional charges and legal action by the lender to recover losses, such as debt collection or a County Court Judgement.
An example of unsecured debt is student loans or credit card debt.
If you have fallen into a debt spiral and need advice, talk to Clive today on 01656 661426 and set up a FREE consultation or click here to contact him. He will find a sensible debt solution to your problem and help you get out of the red and back into the black.