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Secured Debt or Unsecured Debt: What’s the Difference?


Once you apply for a debt agreement, you will be asked to choose from two general types of debts—secured or unsecured. Without a good background on these types, you wouldn’t know your rights as well as your risks in signing for a particular debt agreement.

secured unsecured debt

1. The Presence of Collateral

The basic difference between secured and unsecured debts lies in the presence of collateral.

Secured debts require collateral as the lender’s security in case you fail to pay them. This is accomplished by means of a lien placed by the lender to your debt. In layman’s terms, the lien refers to a restriction placed by your lender to inhibit you in doing anything with your collateral under specific terms and conditions.

Unsecured debts do not need collateral. Furthermore, there are no liens for the items that you paid in the unsecured debt you sought. It only relies on your word to honor the debt agreement you signed.

2. Interest Rates

Since the collateral gives your lender additional guarantee for payment, lower interest rates are set for secured debts. You have to remember though that as a borrower, there is a greater risk for you and your assets if you cannot pay.

On the other hand, unsecured debts have higher interest rates as there is the absence of collateral.

3. Penalties due to Nonpayment

If you sign for a secured debt agreement, the repossession and/or foreclosure of your collateral are usually the penalties for nonpayment. By repossession, the lender retrieves the collateral; by foreclosure, the lender sells the collateral to claim its monetary value. If what they claimed still does not cover up your debt, then you are subject to another settlement.

The penalties for unsecured debts are court orders and wage garnishments. This even includes the harassment of some debt collectors your lender will hire. Although there is no collateral, the lender may still request to claim your assets by means of a court order.

4. Practical Situations

Mortgages and auto loans are the best examples of secured debts. Your collateral is the house or car you have acquired and applied a loan for, which your lenders are free to take if you fail to settle your payments.

Credit card services are the best examples when it comes to unsecured debts. If you purchase with a credit card and you fail to pay for a year, your lender will not repossess the items you paid for. You will either be summoned to court or to a settlement with a debt collector.

Aside from your capacity to pay, it is also important to prioritize knowledge and awareness. The key to financial success relies on your wisdom in creating good financial decisions.

Secured Debt Loans – What Are They?

Secured Loans are loans secured against your property. This means that if you default on your repayments for the loan, the lender can sell your house and use the money to pay off the loan.

Unsecured loans have no link to your property, so you do not need to own your own house to get one. Most ordinary, personal loans are of the unsecured type.

Why On Earth Would I Want One?

Because Secured Loans are secured on your house, lenders are more willing to take a chance than with an unsecured loan. For this reason, you are more likely to get a secured loan even if you have a poor credit rating. Lenders therefore often present them as an easy way for people with credit problems to borrow money.

The fact that they are secured against the value of your house means that relatively large amounts of money can be borrowed.

Secured Loans tend to be spread over much longer periods than most unsecured loans, so the monthly payments are smaller (though you obviously pay more in the long run).

Other Points To Consider

Secured loans will usually have a variable interest rate, unlike the fixed-rate you will get with most unsecured personal loans. Make sure you know what the lender’s terms are with regard to interest rate changes. Your house is at stake, so be very sure that you can afford to keep up payments if interest rates increase.

View secured loans as a last resort, rather than an easy option when you have debt and credit problems. There is nothing easy about losing your home. Consider very carefully before committing.

If you are using a secured loan to consolidate your debts, don’t be tempted to automatically transfer all your debts to the new loan – just select the ones that are at a higher interest rate than your new secured loan. There is no point paying off debt and taking one on that will cost you even more.

Prepare a Financial Statement, so that you understand how much available income you have and therefore how much you can afford to pay back each month. Allow for the fact that interest rates could go up.

Don’t be tempted to take secured loans out for any more money than you really need.

If you remember one point from this information, I hope it is this – do not enter into secured loans lightly and do not take one out unless you really have no other choice.

Homeowner Secured loans

The widely used type of lending for people who need to borrow fairly substantial amounts of money is a homeowner secured loan, or home equity loan. These are only an option if you own your own house or have a mortgage, and should not be entered into lightly. The money you borrow will be secured against your home, so ultimately the lender’s security comes from knowing that if you cannot keep up with payments they can arrange to sell your house to repay their loan.

Given the high value of the asset that is used to secure the loan, they are a good way to access quite large amounts of money, which can be paid back over an extended period of time.

When An Unsecured Debt Loan May Be Useful

When a consolidation debt loan Could Help You:

  • When you are paying high interest rates on current debts.
  • At times of low interest rates because the rates on a new loan should be better than the rates on your existing debts.
  • When you have checked properly what you can afford and you are positive you can meet the new loan repayments for the full term of the debt consolidation loan.

When An Unsecured Debt Loan May Not Be The Best Solution

  • If you have taken out debt consolidation loans before and it has not worked for you.
  • If you plan to use it to pay off a previous debt consolidation loan.
  • If you want to pay off credit cards so that you can carry on using them again.

When Considering Using Unsecured Loans To Consolidate Debt:

  • Only apply to well established and reputable lenders.
  • Apply to at least two or three companies so that you can compare interest rates and offers.
  • Consider whether you have enough surplus income each month to make the new payments (you might even want to prepare a Personal Financial Statement to identify your Surplus Income).
  • If you think your situation might get worse, or you are in doubt about whether you will keep up with the payments, consider a more flexible Debt Management Plan instead.
  • If you are using the debt consolidation loan to pay off credit cards, make sure you cut the cards up and cancel them straight away. DO NOT continue to use them.

Debt consolidation loans can be a useful thing, provided you use them properly. If some of your existing debts are at a particularly high rate of interest, and interest rates have since dropped, then you may be able to get a loan at a lower rate of interest than your old debts and save yourself some money.

The best way to check this is to list out all your existing debts with the rates of interest that you are paying on them. Put them in order starting with the highest interest rate at the top.

Take the interest rate for the consolidation loan you want to take out and draw a line across your list at that level. If you only use a loan to consolidate the debts above that line, you will be better off.

Know Your Rights When Negotiating Unsecured Debt

It is true that in the long run creditors can submit accounts for legal action; after all, they have a right to collect on the money they lent out to their clients.

Actions such as collection efforts which include correspondence, telephone calls followed by wage garnishments, lawsuits, etc… are governed by the Fair Debt Collections Act put in place to protect consumers. This act is a must-read or a guide to those thinking on negotiating settlements on their unsecured credit card debt.

In this act, you will find the guidelines all creditors and collectors must adhere to when collecting on delinquent debt. It is true that once a debt settlement process has begun no one can tell if a creditor or collector will use legal action as a means to collect on the undue debt.

The best-informed a consumer is, the best the chance to be successful at negotiating settlements he/she will be, I strongly recommend reading and keeping handy the information regarding the Fair Debt Collections Act for your protection.

Settle Unsecured Debt ASAP

It is true creditors can claim much of the unsettled debt as a loss and still not take a big hurting, but in these times of recession, every penny they collect from their debtors is better than none at all.

Usually, a creditor will charge off an account about 180 days delinquency, this means the account will be forwarded to a collection agency or sold to a junk debt buyer. Once this happens settlement percentages will change, some for the best some for the worst.

Collection agencies and junk debt buyers are now more and more buying old debt from creditors. In the past they would serve as a third party collecting on the creditor’s behalf and earn a percentage on the money collected from the debtor, some collection agencies and creditors still handle business in such a fashion.

Others now buy the debt directly from the creditors for pennies on the dollar and claim they cannot settle the debt for less than 80 or 70%, thus making a tremendous profit for their efforts.

Some of the junk debt buyers, who also buy old debt for pennies on the dollar and hire debt collection lawyers for their collection process. There are ways to get better deals from these companies, but one must know what to do to achieve them.

Some accounts depending on the creditor believe it or not are better off going to collection agencies for better settlements. There are a handful of creditors that under no circumstances will negotiate a reduction on debt owed.

In this case, a negotiation professional can inform you as to which accounts to negotiate with the original creditor and which ones to negotiate with a collections agency.

The debt settlement industry is forever changing, dictated by the decisions taken in the credit card company board rooms every day. Debt negotiators are aware of these changes as their job is to speak to these very companies every day.

No debt settlement service can exactly estimate how much money anyone can save by negotiating on their debt for the same exact reasons I just mentioned, the best way to know this is to engage in negotiations. Once a negotiation is underway your debt settlement negotiator will have a better idea of the probable savings.

One fact is true the more active a person is in pursuing agreements with their creditors or collectors the sooner all the debt will be settled.

Hiding, for the most part, will do no good as interest rates, penalties and late fees will continue to accumulate. All creditors, collection agencies and junk debt buyers will factor in these added charges when collecting on the unpaid accounts.

Therefore it is extremely important to remain proactive in the pursuit of arrangements to eliminate all debt. One of the most important decisions is to find the professional help which will help you do it as fast and as efficiently as possible.

Negotiate Unsecured Debt

Delinquent is a term used by creditors and collectors to describe accounts which payments are no longer being made on. As soon as a payment is missed an account becomes delinquent.

These accounts must be at least 90 days behind in order for creditors to consider settlement offers on them. Meaning for three months before the account can be negotiated on the account is accumulating late fees, penalties and increased interest rates.

Some accounts are usually better negotiated on with the original creditor before they are sent to a collection agency and some are better off going to a collection agency for negotiation. This information is key when negotiating unsecured debt.

Who knows this information better than an unsecured debt negotiator? Not too many people do. That is why it is best to let a professional handle all negotiations on delinquent accounts. The experience and the know how a debt negotiator possesses is unique and invaluable.

If collection calls and letters, threats from collectors are too much to handle maybe it is time to seek help. Debt negotiation companies can help lessen that stress greatly. Debt negotiation companies will contact creditors and collectors and aim for all phone calls on a client’s behalf to go to them.

Not all calls will be stopped but they will lessen. Negotiators will use a document called a Power of Attorney to try and give clients a chance to eat dinner in peace. If accounts are delinquent and phone calls from collectors are a problem, debt relief is a great option.

Save More Money Through Negotiating

Negotiating on unsecured debt is a way to save large amounts of money. Depending on how many months delinquent the account is and who is collecting on the account will dictate savings that is much needed after allowing the account to accumulate late fees and penalties for non-payment.

Settlements can range anywhere from 30 to 70 cents off on the dollar. It may be worth exploring the possibility of a settlement to get back some of the money lost on late fees and penalties.

Settling accounts in delinquent status will also help credit scores begin to repair by lessening the debt to income ratio. This is extremely important if there are wishes to take on new loans such as buying a house. Think of it as getting back your financial health.

Additional help may be required by credit repair companies to speed up the process of repairing the credit score to good standing. Ask the debt negotiation or settlement company to try and negotiate with creditors and collectors to remove the information they have reported to the credit bureaus.

Negotiating unsecured debt can bring back peace of mind for many people as long as it is done in a responsible manner, consult various debt settlement, negotiations companies before deciding on one of your choices.

Remember in order to settle delinquent accounts funds must be made available to close the offers brought back by your negotiator, this is perhaps the most essential part of any negotiation, money.

Warren Paine

Warren is the senior mortgage loan officer who has worked in mortgages and loan industry since 1995. He study in Harvard and major in Finance with a Bsc. Honor Degree. He possesses a Paralegal Certificate as well.

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