subject: Unsecured Debts Vs. Secured Debts – How To Manage Different Types Of Debt [print this page] Unsecured Debts VsUnsecured Debts Vs. Secured Debts How To Manage Different Types Of Debt
For a society as complex as the United States, categorization is very important. From the legal area to the political, from the medical area to the academic, every field has categories. The area of finance is no different. One aspect of finance that is categorized is debts. There are two overarching ways that debts can be categorized: as unsecured, or as secured.
Unsecured debts are debts that result from loans that are taken without any collateral. For example, someone may take a home loan without offering any property to the bank as a type of insurance that the loan will be repaid. Other examples unsecured debt are credit card debt, personal debt, medical debt, and commercial debt. Effectively, unsecured loans rest on a promise from the debtor to the creditor that the loan will be paid back. Because there is not collateral to ensure repayment of a loan, the interest rate for unsecured debt is usually very higher. People who cannot repay their unsecured debts face the prospect of legal action being taken against them. However, creditors may instead choose to work out a repayment plan with the debtors.
The other type of debt is secured debt. Secured debt results from loans that do have collateral. So for example, when someone takes a home loan and offers her car as insurance for the repayment of the loan, the debt of the debtor is secured debt. Because of the nature of secured debt, if a debtor cannot repay his debts, then the creditor can seize the collateral property for herself. If collateral is seized, and the debtor still has debt to pay back to the creditor, then the debt becomes unsecured unless and until new collateral is put in place. An important to thing to note is that secured loans come with a lower interest rate because they have the collateral as insurance. Moreover, lenders are more secure about giving a secured loan than an unsecured loan. Additionally, unsecured debts are easier to get removed if bankruptcy occurs.
People who face bankruptcy, whether because of secured or unsecured debts, will need help navigating the legal process of filing bankruptcy. Part of the reason is because filing for bankruptcy can be very confusing. Additionally, there are ways that people can file for bankruptcy in their favor. Having unsecured debts discharged is one example. Because most people do not have a complete knowledge about bankruptcy, guidance helps
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