Debt is an unpleasant though unavoidable reality for most Americans, but the key to overcoming and effectively managing debt is understanding the different kinds. One of the most frequently misunderstood aspects of debt is how it’s collected and what it’s attached to. Secured and unsecured debt is simply the difference between debt attached to assets versus debt without assets. Let me explain more about the difference between secured and unsecured debt.
1. Collateral and Assets
The major difference between secured and unsecured debt is what the debt is attached to. Simply stated, secured debt means that the debt is attached to a tangible item, like a home or a car, whereas unsecured debt is money you owe a lender unattached to any asset. While assets can be seized if you default on an unsecured debt and get taken to court, assets are not related directly to your debt unless it’s secured debt. If you default on an auto loan, on the other hand, then the creditor can seize your vehicle much more easily.
2. How Collections Take Place
If you fail to pay an unsecured debt, then in order to collect, a creditor may take you to court. This can result in seizure of other assets orgarnishment of wages. If a creditor sues you successfully for the sum owed, your wages may be garnished at 25 percent if your disposable income is over $290. This also varies with different state laws.
A secured debt, on the other hand, means that the asset attached to the debt will be repossessed, such as a car or home. If you fail to make auto loan payments, then your vehicle may be seized to recoup the debt. If you can’t make mortgage payments, then your home will be foreclosed upon. This is how outstanding secured debt is handled if you can’t pay. Both secured and unsecured debt can be passed onto a debt collector, though it’s usually unsecured since it’s more difficult to get borrowers to pay if they default on a loan without tangible property to seize. However, depending on the amount you owe and the creditor, creditors will chase unsecured debts for years before giving up.
3. Different Types of Loans
A few examples of unsecured debt are student loans and credit cards, whereas common secured debt is mortgage, auto loans, or property. Certain unsecured debts can also not be discharged during bankruptcy, such as student loans, which makes that type of debt particularly tricky. The way different types of debt are collected and discharged vary legally.
4. Prioritizing What to Pay
If you can make your minimum payments and you’re trying to figure out what to pay off first, always go by APR. The longer you have a balance with unsecured debt and a high APR, the more money you may as well be burning. Credit cards are especially notorious for having high interest rates that end up eating minimum payments so that you’re basically just paying to maintain a balance. Paying off loans or credit cards with high APRs first is always advisable. Many secured debts have lower interest rates, especially if you’ve purchased a home and a mortgage, since banks frequently offer attractive rates if buyers are eligible.
Secured debt makes it more straightforward for a lender to repossess your property if you fail to pay, whereas unsecured debt gets into debt collectors and court cases if you default on a loan or line of credit. What’s easy to remember is you either own something, or you don’t.