What is secured debt, and what is unsecured debt? In this PDS blog, we explore the meanings of both terms, respective examples and key differences between them, and what an unsecured debt consolidation loan is. Read on to learn more!
What Is Secured Debt?
When you offer a lender an asset or property to obtain a loan, the asset or property becomes “collateral” for the loan. The collateral offers the lender “security,” meaning that this type of loan is very safe for a lender.
Secured debt means that the lender has the right to take the asset or property that was offered as collateral. If the borrower cannot make his or her payments, the lender can recoup the money that was borrowed by selling the asset or property. That is why secured debt is “low-risk” for lenders. They do not have to be too concerned that they will never see the money they lent a borrower after it lands in the borrower’s hands.
Secured debt is also advantageous for borrowers. Because the lender’s risk is lower, he or she can offer a loan without charging the highest interest rates. Borrowers have an incentive to repay the lender because, if they do not, they will lose their assets or property. Lenders can also relax lending criteria when a loan is secured. For example, they may accept borrowers with lower credit scores if the borrower puts up a piece of property as collateral.
Secured Debt Examples
One example is a mortgage loan. People obtain mortgage loans to purchase real estate, and the real estate becomes the collateral for the loan. If the homeowner defaults on the loan, the lender can foreclose on the property and sell it.
Another example is an auto loan. The automobile will be used as the collateral.
Third is a secured credit card. The consumer makes charges on the card like a traditional credit card, but they must first make a deposit at the bank. The deposit secures the card against a default on purchases made with the credit card.
What Is Unsecured Debt?
Unsecured debt is a loan that does not have collateral securing the loan. This fact makes it riskier for the lender. Therefore, it is much harder to qualify for an unsecured loan, and the interest rate will be higher.
Unsecured Debt Examples
An example of unsecured debt is the traditional credit card. In this case, you are not offering the bank a deposit before you begin to charge your purchases on your card. You can obtain a personal loan in the same way without offering anything as collateral.
Student loans are also a type of unsecured debt because parents and students are not required to offer anything as collateral.
Medical bills are another form of unsecured debt.
Unsecured Debt Consolidation Loan
An unsecured debt consolidation loan is a loan that some people receive to pay all of their unsecured debts in full. This is advantageous for people with several unsecured debts because one unsecured debt consolidation loan reduces all of the borrower’s unsecured debts to zero. Then, the borrower only has one payment to make every month for the unsecured debt consolidation loan.
The unsecured debt consolidation loan eliminates the need to make several payments to many different lenders. Borrowers can also stop paying several high interest rates in favor of paying one lower interest rate for the unsecured debt consolidation loan. It saves borrowers a lot of money in interest and reduces the time that they need to repay their debts in full.
Secured vs Unsecured Debt
Before you consider taking out a secured loan, you must keep in mind that you will lose the collateral if you default on the loan. You must be sure that you can make the payments throughout the life of the loan.
If you decide on an unsecured loan and default, you will pay the price with your credit history and scores. Either way, repayment of the loan will be paramount.
To learn more about debt, repayment, and loan options, contact PDS for your free debt assessment.
