Secured debt vs. unsecured debt

Category: Credit

Worried Young Woman Doing Calculations

Debt can usually be classified as either unsecured or secured. Whether you’re just establishing your credit for the first time, or you’re working on a plan to eliminate current debts, it’s helpful to understand the difference between the two:

Secured debts

Secured debts are loans that are secured by assets, which is also known as collateral. If you make a monetary deposit, for instance, that deposit becomes the collateral and the loan becomes secured. People with poor credit may need to turn to secured loans as they establish or rebuild their credit. The collateral that is used in order to secure the loan is meant to offer protection for the lender, in case the borrower defaults on the payments. A perfect example of a secured debt is debt incurred from a secured credit card. Secured credit cards are secured debts because borrowers receive a line of credit after they make a monetary deposit. For other types of loans where an actual asset is used instead of money (such as a car), the lender may have the right to take possession of and sell the item in order to satisfy the unpaid debt. Another example of this would be a mortgage loan; with a mortgage loan, the home itself is collateral. If the borrower defaults on the mortgage loan payments, the lender may eventually foreclose on the property. While there are plenty of legitimate and safe loans that are classified as secured loans, there are also a lot of risky loans that fall into this category. Car title loans, for example, use the title of your vehicle as collateral. The lender has the right to take ownership of your vehicle if you’re unable to pay back the loan. These types of loans can be very costly to pay back and many borrowers have a hard time coming up with the money to pay them back in such a short time—often just 30 days. If you can, try to avoid risky secured loans at all costs.

Unsecured debts

Unlike secured loans, unsecured debts come from loans that are not linked to any collateral, but rather just to your credit. If you become severely delinquent with an unsecured loan, a lender may take further action in order to recover the money you owe. They might hire a debt collector, or attempt to sue you for the unpaid debt. If a creditor is successful at obtaining a judgment against you, a lien could be placed on some of your assets, or your wages could be garnished. If your wages are garnished, your employer will receive a court order to set aside a specific amount of your paycheck. That money will go to the lender and is used towards your past due debt, and wage garnishment will usually continue until the debt is paid off in full. It can be easy to get into debt if you take out a lot of unsecured loans that you’re unable to pay back. There are a lot of different types of unsecured debts, including student loan debt, medical debt, etc. Credit card debt, however, is one of the most common types of unsecured loans.

Are you in debt and could use some extra money to pay it down? Are you receiving long-term payments from an annuity or structured settlement? Peachtree Financial Solutions can help! At Peachtree, we help people get their money sooner by purchasing some or all of their future payments. Many of our customers have used their lump sum payment to pay off debt, and if you’d like to do the same, we want to help you accomplish your goal. Contact Peachtree Financial Solutions today to learn more about selling future payments for a lump sum of cash.

Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.

Tags: assets, car loans, car title loans, Credit Cards, Mortgages, payday loans, secured debt, unsecured debt

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