Unsecured debt – what it is and how is it different from secured debt

As we all know, debt is all around us. When you get your monthly bills and you see numbers, that your salary cannot cover, then you can see debt problems on their way. Having such financial obligations has become somewhat more common than being debt-free. In an economic environment where owing money has become a normal way of living, it is really important to know and to understand the differences between these different financial obligations that you may have.

Knowledge is power

unsecured-debt
Knowledge is power

Financial problems, like most other problems in life, require knowledge and understanding of the specifics in order to be dealt with. Imagine taking pills without knowing what you are actually taking and why you are taking them. The same can be said about debts. However, there is no school that can teach you how to deal with such financial problems. You normally have to figure that out all on your own. Yet, such financial troubles can put so much pressure on you that it can be hard to understand them even while actually having to deal with them. Often people get lost in their problems with debt, which leads to a spiral of poor decisions, which ultimately only makes their situation worse.

Should you worry about debt if you are currently not carrying any?

Should you worry about debt if you are currently not carrying any?
Should you worry about debt if you are currently not carrying any?

If you are in a situation where you are without such uncomfortable financial obligations, then you must be doing something right. However, keep in mind that there are many people with good, stable jobs, who are also doing a good job at managing their budgets. However, they too often find themselves in debt. How is this possible? It really is the world that we live in. Having a good job and working hard, while also putting the effort in managing your budget is simply no longer enough to keep you safe from financial trouble. The living costs have increased while the level of income has remained fairly the same. This leads to an economical unbalance for which you cannot really prepare. Then, there are the unexpected emergency expenses that are often the reason for lots of people to go into debt, since there is no bulletproof way that you can really prepare yourself for such expense. Rather than creating a safe fund which may not always be big enough to allow you to manage such situation without getting financial assistance.

What are the different types of debt?

There are different ways that you can categorize the various types of debt. Even though there are a lot of different types of financial obligation, owing money can generally be put into two main categories: unsecured and secured debt.

What is unsecured debt?

What is unsecured debt?
What is unsecured debt?

Unsecured debts are financial obligations that do not have a specific property such as your car or your house, serving as a collateral. That means if you are unable to repay the money that you owe, your creditors cannot seize any of the property you own, at least not without getting a court judgment by suing you for the money you have not repaid. Such forms of debt include medical bills, credit card debts, utility bills, and basically every other type of loan that you have acquired without backing it up with an underlying asset. Since such unsecured loans are not backed by any of your property, they usually have higher interest rates due to the higher risks that loan lending companies take when they issue such loans to their customers.

So what are the consequences of not repaying your unsecured debts?

 unsecured debts
consequences of not repaying your unsecured debts?

As we have already mentioned above in the article, if you fail to make your unsecured loan payments, the loan lending company cannot repossess any of your property, since none of it has been used as a collateral for the loan in the first place. However, that does not mean that you can simply not repay your unsecured financial obligations and go on to live your life as usual. Even though loan lenders cannot directly seize your assets, there are still a number of things that they can do to obtain what is owed to them. In case you fail to repay your unsecured loan, the loan lending company can directly get in contact with you to collect the money that you owe. The loan lending company can report you to a credit reporting agency or even take criminal action against you by filing a lawsuit.

What are the advantages and disadvantages of unsecured debt?

As you are aware of by now, unsecured debt is not tied to any property like a car or a house and so this is something that you can generally feel safe about. However, failing to repay your unsecured loan can definitely get you into a lot of trouble, like significantly damaging your credit score and leaving you unable to get another credit, at least not anytime soon.

 

  • Advantages that unsecured loans can offer

 

Advantages that unsecured loans can offer
Advantages that unsecured loans can offer

For some people, unsecured loans can be the perfect solutions for many different situations. If you are paying off a debt on schedule, taking out an unsecured loan can give you many benefits. It can allow you to quickly improve the state of your credit score, which can, of course, enable you to get a bigger line of credit with much better terms, including a lower interest rate. When loan lending companies see that your repayment history shows constant successful debt repayments, these companies are far more likely to offer you a loan with better terms. All in all, unsecured loans are usually very quick, easy to access and can be quite helpful in many different situations, as long as you know what you are doing and are aware of the risks that you are taking.

 

  • Here are some of the disadvantages

 

You need to know that unsecured loans are not tax deductible. One of the major downsides to unsecured debts is the higher interest rate they carry. Many borrowers are applying for secured loans, just so that they can qualify for a loan with a lower interest rate. After all, the interest rate is the one thing that is going to cost you the most anytime you want to get a loan. And so it only makes sense to try to avoid getting a loan with a higher interest rate.

Secured debt

Secured debt
Secured debt

As you may have guessed, secured loans are types of loans which you obtain by offering some property as collateral. Secured loans normally have lower interest rates due to the fact that they are backed by your car or your house, which naturally attracts the interest of many borrowers. However, that does not mean that secured debts are better than unsecured loans. Keep in mind that, by taking out a secured loan, you are putting your property at risk. This is because if you fail to repay your secured loan, the loan lending company has the right to repossess the property that you have used as a collateral for the loan.

Bottom line

Both unsecured and secured debts have their pros and cons. It all comes down to what situation are you in and what this situation requires.

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