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Understanding the Differences Between Secured and Unsecured Debt
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Posted On :
Jan-08-2013
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Article Word Count :
576
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Mortgages and credit cards typify two kinds of debt that affect borrowers in critically different ways. Secured debt is backed with collateral such as a home or car, and most often the debt is incurred to purchase the asset.
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Mortgages and credit cards typify two kinds of debt that affect borrowers in critically different ways. Secured debt is backed with collateral such as a home or car, and most often the debt is incurred to purchase the asset. The lender puts a lien on the property until the borrower pays the debt in full. Unsecured debt is not tied to an asset, and the creditor cannot take the debtor's money or property as payment without a court ruling. Credit cards account for most of the unsecured personal debt in the U.S.
How Lender Collection Rights Differ
If the borrower defaults on secured debt, the creditor has the right to reclaim the collateral asset as payment. In a property foreclosure, the lender repossesses the home if the borrower fails to pay the mortgage. Foreclosure is the legal process that the lender must follow in order to obtain clear title to the property and sell it. After becoming the legal owner, the lender can sell the home to cover the loan and may pursue the debtor for any remaining amount. Creditors can repossess smaller assets such as vehicles without resorting to court action.
If a debtor falls behind on an unsecured debt, the creditor usually takes escalating steps in an attempt to collect. The lender will engage a collection agency and eventually may take the borrower to court in order to obtain payment by other means. Depending on state law, the lender may win the right to garnish wages, place a lien on an asset, or seize an asset to sell. Creditors often won’t sue unless the amount owed is large enough to justify the expense, but they have the right to do so.
How Loan Type Affects Borrowing Terms
Individuals usually obtain secured loans in order to finance major purchases such as a house or car. Because lenders have collateral, they can offer lower interest rates than for unsecured debt. Rates for fixed-rate mortgages and most auto loans are fixed, which means that the borrower can count on the same payment throughout the life of the loan.
The debtor benefits from favorable terms but also assumes the risk of the lender repossessing the asset if the debt is not paid. This is one reason why people in financial difficulty are often advised to pay secured debt first. Another reason is that secured loans are used to buy essential housing and transportation.
Unsecured debt usually has higher and more variable interest rates than does secured debt. For example, credit card lenders may offer a low introductory rate that automatically rises after a certain number of months or if the balance is not paid in full by a given date. Many cards also raise rates significantly after delinquent payments.
Sometimes people take out an unsecured personal loan in order to obtain cash. These loans generally have higher interest rates than secured loans due to the lack of collateral. However, the rates may be lower than for cash advances against credit cards. Most unsecured loans offer fixed terms of up to five years.
Many households carry both secured and unsecured debt and must make decisions on payment priorities or new financing. The benefits of one type of debt over the other depend on each situation and the loan’s purpose. The wise approach is to understand all options before putting hard-earned money on the table.
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Article Source :
http://www.articleseen.com/Article_Understanding the Differences Between Secured and Unsecured Debt_243917.aspx
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Author Resource :
The author has an immense knowledge on secured debt. Know more about unsecured debt related info in his website.
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Keywords :
unsecured debt, secured debt,
Category :
Finance
:
Finance
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