by Brent Barnhart
Secured vs. Unsecured Debt: What’s the Difference?
The subject of debt can seem somewhat overwhelming to understand. That said, being familiar with the different types of debt is essential for those looking to borrow. Without such knowledge, one could easily find themselves in a financial hole. The difference between secured and unsecured debt is substantial, meanwhile student loan debt is a whole other ballpark. By learning about the diversity of debt, one can figure out how to borrow smartly, meanwhile knowing what to expect when its time to pay back, especially while seeking a credit score loan.
Secured debt implies debt that usually involves some form of collateral. Such collateral could include a home in the case of a mortgage loan, or perhaps a car in the case of an auto loan. Additionally, secured debt usually has a lower interest than that of unsecured debt. The reason for this is the existence of the aforementioned collateral, because banks can simply keep possession of collateral if a borrower cant make payments. Secured debt should always be the first debt that one pays off when addressing their loans, as lenders can easily hold on to your collateral property if you fail to pay accordingly.
Unsecured debt is a different animal than secured debt in the sense that the former entails no collateral whatsoever. What it does entail, however, is a very specific contract or some sort of documentation that guarantees your ability and intent to pay back the loan. These loans are a much bigger risk to lenders due to the lack of collateral, and therefore interest rates are often relatively high. Student loan debt can be viewed as a type of unsecured debt (there is no physical collateral involved), although it is technically secured by the government in the sense that the government ensures lenders that the loan will be paid. While failing to make payments on unsecured debt wont see the immediate loss of your home or car, you will see your credit score suffer immensely. With that in mind, unsecured debt should be paid off after secured debt, as losing your house is easily more traumatic than harming your credit score, although both are obviously undesirable.
Those looking for credit score loans or loans to improve their credit should look into having debt thats both secured and unsecured. Doing so speeds up the process of improving your credit score and helps in rebuilding your credibility as a legitimate borrower.