The difference between Secured and Unsecured Loan. There are two major types of debt: secured and unsecured. When we know their differences, we will prioritize debt repayment after borrowing.
Difference Between Secured and Unsecured Loan; Secured Loan
A secured loan has assets as collateral. The assets could be a house or car. The asset serves as collateral for the debt (hence why it’s called a “secured” loan). Financial institutions place a lien on the asset, this gives them the right to seize (e.g., repossess or foreclose) it if you do not pay. If the lender takes the asset, it will be sold (often at an auction). In case the selling price for the asset does not cover the entire debt, the lender may come after you for the balance.
An auto loan is an example of secured debt. Your auto loan is secured by your vehicle. If you become delinquent on the loan payment, the lender can repossess the property. A title loan is also a type of secured debt because the loan is secured with title to a vehicle or other asset. The asset is not yours until you pay off the loan and get it back.
In an unsecured loan, lenders do not have rights to any collateral for the loan. If you fail to pay, they generally cannot claim your assets for the debt.
However, the lender may take other actions to get you to pay what you owe. For example, they can hire a debt collector to force you to pay the debt. If that doesn’t work, the lender may sue you and ask the court to garnish your wages, take an asset, or put a lien on your assets until you’ve paid your debt. They’ll also report the delinquent payment status to the credit bureaus to be reflected on your credit report. Consequently, lenders of secured debts take these actions, too.
Unfortunately, Credit card debt is the most widely-held unsecured debt.
In situations that you cannot pay all the bills, make sure to PAY the secured debts. This is because they are sometimes harder to catch up with and you stand to lose essential assets (e.g., shelter) if you fall behind on payments.
However, unsecured debts sometimes have higher interest rates, which can take longer to pay off and results in higher amounts paid. Carefully review the one that has greater damages and pay that first.