All debt is not treated the same. If you’re trying to manage your debt responsibly and are researching different options, we advise you to look carefully at all of the details. 

The key difference between the two comes down to collateral. Collateral is an asset that you agree to forfeit in case you are unable to pay back the loan. This can include property, vehicles, or cash assets. There are other differences, which we will dive into below.

What is Secured Debt?

Secured debt usually requires that you provide collateral to your lender. If the debt goes into default, the lender can seize the asset. As a result, these types of loans typically offer better financing terms and lower interest rates. These lenders may also be less strict about credit scores.

Secured debt presents a lower risk to lenders, hence why they are able to accept lower quality candidates. 

Secured debt will usually require a security deposit to open.

Mortgages and auto loans are two of the most common types of secured debt you will encounter. 

What happens if you don’t pay this debt back? 

As a borrower, you should know that even though the conditions of the loan may be more amiable than an unsecured loan, the collateral could be taken if you don’t repay the debt. 

What is Unsecured Debt?

There’s no collateral required for unsecured loans which are typically credit cards, student loans, and personal loans. 

Lenders tend to have stricter requirements for these loans because they aren’t backed by collateral. They take a closer look at your credit history and credit score.

Unlike secured debt, you don’t have to worry about paying a security deposit. 

Credit limits are higher for unsecured debt than for secured debt and you may receive other benefits like cash back or rewards miles. 

What happens if you don’t pay it back?

The consequences of missing payments may result in late fees and additional interest charges. If you miss enough payments, your account may be sent to collections. If you default, the lender will report you to credit bureaus and this activity will stay on your credit report for up to seven years.

Kentuckiana Debt Relief Attorney 

Regardless of which type of debt you decide to take on, you should have a plan for paying it back. Each type of debt has own advantages and disadvantages, risks, and requirements. Consider your credit history, financial goals, and cash flow before taking on any loans.

Of course, it is always wise to check the conditions of your specific loan. These conditions will outline any fees or penalties for missed payments. 

Should you find yourself struggling with creditors, please give our team a call at (502) 583-8300.