Secured Debt Vs. Unsecured Debt

Debts are categorized into many different types. Secured and unsecured debts are among the basic ones. As the lending institutions are coming up with different types of loans, day by day, it is always better for the prospective buyers to generate some awareness about the basic debt types and their financial as well as legal implications.

Secured Debt

Secured and unsecured debts are among some of the basic debt types that are commonly seen today. As the name rightly suggests, a secured debt is secured with a collateral. To be more precise, the borrower pledges certain assets as collateral, for obtaining the loan. This collateral can be acquired by the lender, in case of defaults made by the borrower, in loan payments. One of the common example for secured debt is mortgage loans. Even car loans can be categorized as secured debts. In case of purchase of real property with mortgage loan, the property is pledged as a collateral. If the borrower fails to make mortgage payments, the lender may resort to short sale or foreclosure, so as to realize the debt amount. The same applies to car loans, wherein the vehicle is used is as the collateral.

Unsecured Debt

So, secured debt is secured with a collateral. In case of unsecured debt, there is no such collateral, that can be used by the lender, if the borrower defaults in debt repayment. In other words, the loan is granted on the basis of the assurance given by the borrower that he will repay it. The lender is not entitled to seize any property of the borrower, so as to realize the debt, in case of default. However, the lender may obtain a legal judgment against the borrower, as a recourse to collect the debt amount. Credit card debts and personal loans are classic examples of unsecured debt. We all know that these loans do not require any collateral. In other words, the borrower is not required to pledge any asset, so as to obtain the loan. Both these types of debt have their own advantages and disadvantages.

Difference Between Secured Debt and Unsecured Debt

Now you understand that the basic difference between secured and unsecured debt is the requirement of the collateral in the former. So, the lender is more secured in case of secured debt and the risk associated with lending is very low. In case of unsecured debt, there is no guarantee for debt repayment and so these loans are associated with a high level of risk on the part of the lender. The percentage of risk is reflected in the loan interest rates too. As secured debts are associated with low risk levels, the interest rates are found to be lower, whereas it is much higher in case of unsecured debts. Most of the secured debts are installments debts, wherein the borrower is required to pay a predetermined monthly installment for a set period, within which the debt has to be repaid. But, unsecured debts are mostly found to be revolving debts, in which the interest rates and EMIS may vary. In case of default in repayments of secured loans, the pledged assets are at risk and can be acquired by the lender. In case of unsecured loan, defaults can affect your credit history and you may not be able to fetch loans in the future. All the above said aspects are applicable in debt consolidation too. Even though, secured debt consolidation is mostly favored, it also runs a risk of losing pledged assets. Unsecured loan consolidation will require you to pay very high premiums.

The above said is only a brief overview about secured debt vs. unsecured debt. A basic idea about the difference between different types of debt may prove useful in understanding their financial and legal implications, in case of defaults, for filing bankruptcy, etc. However, make sure to consult a debt counselor or financial adviser, for effective debt management and to gain a thorough knowledge about the different types of loans.