Unsecured Debt versus Secured Debt
What are the Differences Between the Two? –
There are two main types of credit: secured and unsecured. Knowing the difference between the two can help you prioritize your debt payments. It is not uncommon for people to ask about the difference between the two and how they may affect your credit score. We’ll take a closer look at both of them and explain the differences.
Secured Debt –
Secured debt is debt that is backed by some type of collateral such as an asset or revenue from the borrower. You typically encounter secured debt when you purchase a large ticket item such as a house or a vehicle. Mortgages and car loans are two examples of secured debts. If you fail to pay back the loan as agreed, the lender can foreclose on the home or repossess the vehicle for non-payment. Because there are assets the lender can use those assets to recoup their loss in the event of a loan default, interest rates are generally lower on secured loans.
Unsecured Debt –
Unsecured debt is debt that is not guaranteed or “backed” by any type of collateral. Essentially this means that if you default on an unsecured debt there is nothing that the creditor can take back to recover their costs for non-payment of the loan. Interest rates tend to be higher on unsecured debt because there is no collateral for the creditor to seize if you default. Credit cards fall into the category of unsecured debt. A credit card company cannot seize any of your possessions if you do not pay off the balance. Creditors attempting to collect on a delinquent unsecured debt typically turn the account over to a collection agency.
How Secured and Unsecured Debt Affect You? –
Both types of debt will show up on your credit report. A small portion of your credit score (about 10%) is based on the types of debt you carry and whether or not you have a “healthy” mix of credit types. The score takes into account if you have a mix of revolving credit (credit cards) and installment loans (mortgage).
Revolving credit is often the types of loans issued with unsecured debt. Your payment amount can vary, or revolve, based on your account balance and interest rate. Installment loans are typically issued with secured debt. For example, if you take out a vehicle loan, you are given a set schedule of payments. Your payment and interest rate generally remain the same each month until the loan is paid in full.
AdvantageCCS Can Help You Manage Your Debt –
With all types of credit, there are often steep penalties for not paying as agreed. If you’re having trouble managing your unsecured or secured debt, you should contact Advantage Credit Counseling Service and talk with a certified credit counselor. It is possible to get your debt under control, and the sooner you start, the sooner you can get on the path towards financial freedom!
You can also start a free credit counseling session right now!