Knowing the difference is important when you’re borrowing money and prioritizing debt repayment.
What’s the Difference Between Secured and Unsecured Debts?
You don’t fully and legally own the asset tied to the secured debt until the loan is paid off. The lender should remove the lien and release the asset at this point, and the title should be transferred to you free of any liens. Lenders of unsecured debts do not have rights to any collateral. They generally cannot claim your assets for repayment of the debt if you fall behind on your payments unless they sue you and get a judgment against you in court. The judgment acts as a sort of lien in this case. An unsecured lender isn’t without recourse, however. It can take other actions to get you to pay what you owe if you default. It might hire a debt collector to pursue you and try to get you to pay the debt. A successful lawsuit can be used to garnish your wages, take an asset that wasn’t tagged as collateral, or put a lien on your assets until you’ve paid off your debt. This guarantees that the lender will be paid when you sell them. Both secured and unsecured lenders will also report your delinquent payment status to the credit bureaus. The delinquency will be reflected on your credit report and will affect your credit score.
Examples of Secured Debts
Mortgages and auto loans are both examples of secured debts. Your mortgage loan is secured by your home. Similarly, your auto loan is secured by your vehicle. The lender can foreclose or repossess the property if you become delinquent on these loan payments. A title loan is also a type of secured debt because the debt is secured by the title to a vehicle or other asset.
Examples of Unsecured Debts
Credit card debt is the most widely held unsecured debt. Other unsecured debts include student loans, payday loans, medical bills, and court-ordered child support.
The Bottom Line
It’s important to keep up the minimum and installment payments on all your accounts, but times might come when you have less money available to do that. Secured debts are typically the best choice to pay first if you’re strapped for cash and you’re faced with the difficult decision of paying only some of your bills. These payments are often harder to catch up with, and you stand to lose essential assets if you fall behind on the payments. You might give more priority to unsecured debts if you’re making extra payments to pay off some debt. Unsecured debts often have higher interest rates, so they can take longer to pay off. This can result in higher amounts paid overall because interest continues to accrue monthly.
