You want to get out of debt and there are several different methods of debt relief that are available to you. Before looking at how, consider the type of debt you have. There are two basic categories: secured and unsecured debt.
What’s the difference between secured and unsecured debt?
One word easily explains the difference between these two types of debt: collateral.
When debt is secured, an asset that has value is used as collateral. The lender is almost guaranteed to be repaid because if you don’t repay the loan, the lender could take the collateral and re-sell it. It’s a strong guarantee that they’ll recoup the money they loaned out.
If a debt is unsecured, there is no collateral. Credit card debt is a great example of an unsecured debt. The only thing guaranteeing you’ll repay the debt is your promise to repay it. If you break that promise, the lender has limited recourse. The lender could go to court, get a judgement against you, and then go back to court to enforce that judgement.
There’s much more risk for the lender when it comes to unsecured debt, which is a big reason that credit card debt typically comes with much higher interest rates than an auto loan or mortgage. Of course, there’s less risk for borrowers, like you, who take on unsecured debt because there’s no quick process for your assets to be taken if you don’t pay. Due to the limited risk and wide availability of unsecured debts, it becomes simple to accumulate a lot of debt. Finding debt relief isn’t, however, always as simple.
A few examples of secured vs. unsecured debt
Common forms of secured debt include:
- Mortgages, which are secured by the home. The house is the collateral and the lender can foreclose and sell it if you don’t pay your mortgage.
- Auto loans, which are secured by the vehicle. If you don’t pay the loan on time, the lender can repossess the car and sell it if you default on the loan.
- Secured credit cards, which are secured by a deposit of money equal to the credit limit. If you don’t pay the bill, the lender just keeps the money.
Common forms of unsecured debt include:
- Credit cards, other than secured credit cards. Charge whatever you want up to the limit. If you don’t pay, your home and car aren’t in jeopardy of being repossessed. Credit card debt, however, can become a burden on your monthly finances. And you’ll start looking for ways to get out of debt including a debt consolidation loan.
- For most personal loans, even if you use the personal loan to buy tangible assets, the lender doesn’t have the ability to repossess those items if you default on the loan. These can often lead to a drain on monthly finances as well and aren’t recommended for helping you find debt relief.
- Medical debts are all too common. While you may want to get out of debt you have accumulated with a healthcare provider, they can’t take back the healthcare services you received if you don’t pay.
Interest rates are the other big difference
As mentioned earlier, most secured debts tend to have significantly lower interest rates than the loans on the list of unsecured debts. For example, as of September 2018, the national average interest rate on a 30-year conventional mortgage loan is 4.71%. Meanwhile, the average interest rate on a credit card is around 13.64%. The higher interest rates indicate the higher risk the lender has at not recouping their money. They want to insure they’re making a profit. Plus, it’s more likely that a secured debt will be repaid because the lender is able to take and sell the collateral if you don’t make your payments. Because the lender can take the asset, they’re likely to be repaid what’s owed on a secured debt even if you take the extraordinary step of filing for bankruptcy. With an unsecured debt, if you filed for bankruptcy, there’s a chance the debt could be discharged and the lender wouldn’t even be legally allowed to collect. Bankruptcy, however, isn’t usually the best way to get out of debt. Even if you didn’t file for bankruptcy, if you opted not to pay the bill, the lender would face a legal battle to try to recoup the unpaid funds with no guarantee at the end that you’d have money to pay even if they prevailed.
Debt Consolidation Loan Could Help
Now that you understand the basics of secured and unsecured debt, you probably want to know how to get out of debt. LendingMarket can help. We have access to a network of consolidation loan providers that will help you become debt-free. A consolidation loan will help you pay off your unsecured debts, lower your interest rate, and give you a lower monthly payment. We’re ready to help you get control of your unsecured debt.