The type of debt you have affects many areas of your life. Different types of debt impact your credit score in separate ways, they are managed differently by creditors and collectors, and they can influence your financial future in a number of ways. Learn more about the difference between secured and unsecured debt.
What Is Secured Debt?
Figuring out if debt is secured or not is fairly simple. Ask yourself, “Is there anything guaranteeing this debt if I don’t pay it?” For example, a car loan is a type of secured debt. If you are unable to pay it, the lender can recoup their losses by taking back the car. That’s the primary defining trait of secured debt. Mortgages are another type of secured debt. If the loan goes unpaid, the lender can reclaim your home. With secured debt, you do not truly own the property until the debt is paid off. Other examples of secured debt include secured credit cards and title loans.
An Overview of Unsecured Debt
Unlike secured debt, unsecured debt is not guaranteed by any physical items or assets. If you are delinquent on unsecured debt, there is little that lenders can do beyond try to get you to pay or take you to court. Unsecured debt includes credit cards, medical bills, personal or signature loans, payday loans, and student loans.
How These Debts Are Treated Differently
To minimize their risk and maximize their chances of repayment, lenders treat unsecured and secured debt differently. At the lending stage, lenders minimize their risk by analyzing a customer’s creditworthiness. Even if a borrower doesn’t have the best credit, they may qualify for a secured loan if their down payment is large enough and the lender has a way to recoup their losses. However, it is often more difficult to get an unsecured loan if your credit is poor. Some creditors charge higher interest rates in exchange for extending credit to someone with a less-than-perfect credit history.
Collections options vary. If a lender is trying to collect on an unsecured debt, they may focus on pressuring you to make payments via phone or e-mail. If the amount is high enough, they may go to court and try to get a judgment. From there, they may have your bank account garnished.
Secured debt is a different story. If you stop making payments on a secured loan, you typically have some time to bring the account current. During this time, the lender will likely call or e-mail frequently to request payment. If you are still behind, they may repossess the car, home, or other property tied to the loan.