How To Eliminate Consumer Credit Card Debt - Secured and Unsecured Debt
To help you eliminate your credit card debt, short term and long term, it is best to understand as much as possible about the debt (loan) industry, some of its laws as they may affect you, and some of the technicalities. One such technicality is distinguishing between secured and unsecured loans.
The Differences Between Secured And Unsecured Debt
Some people may think of debt as just that.... debt. In reality, though, there are different types of loans. In your efforts to resolve your problems and perhaps eliminate your credit card and other debt, it is important to know what which type you have. You will need to understand the differences in order to be a good money manager, and in the long run, you will benefit greatly from understanding more about finance and loans.
If the worse happens, and you find yourself seeking credit or debt counselling, you will need to appreciate and understand how different types of debt can be dealt with, as there are legal differences that are critical. For the sake of this article, I will consider and briefly explain two types of debt: secured and unsecured loans.
What Is Secured Debt?
A secured loan is a loan that has something of value attached to it. That "something" is called collateral. The most common examples are house and land mortgages, and car loans. But there is also such a thing as a secured credit card, which may be of use to you in rebuilding credit worthiness.
Collateral can take the form of cash, an item (or items) you already own (such as car or house), or an item you are buying with the help of the secured loan. With secured debt, if you fall behind on your repayments, the item or items offered as collateral can be repossessed by the creditor. The lender will sell it in order to collect the money you owe them.
Unfortunately, that does not always clear the debt. In reality, even if the collateral has been repossessed or foreclosed on and sold, you may still remain liable for any balance remaining. A repossessed house may be sold as quickly as possible, thus reducing the market price attainable by the creditor. You are responsible for the debt until the entire amount of the loan is paid off. So, if you owe $200,000 and the house is sold for $150,000, you will still owe $50,000.
Additionally, with secured debt you cannot usually negotiate payments or any restructuring through credit counselling, and often you won’t be able to discharge the debt by filing for bankruptcy. However, you do need to check laws in your own country and the terms of the mortgage or car loan.
What Is Unsecured Debt?
Unsecured debts, though, have a totally different legal standing, and are dealt with in a quite different way. Most people associate unsecured debt with a credit card or a personal loan, without collateral. However, it may also be a commercial debt or a medical debt. Essentially, this type of unsecured loan is structured around a good credit history and a personal promise to re-pay the loan. There is no collateral on this type of debt, hence the title "unsecured".
The creditor has no assurance that they will get paid, other than your personal agreement to repay the amount on pre-determined terms. If you fall behind on one of these debts, a lender can send your account to a debt collection agency, and take legal action if they so choose. More often, though, they will attempt to try and work out a reasonable debt settlement. These debts and loans can be discharged, or restructured in bankruptcy or through credit counseling. Because of the lender’s risk factor, you will generally pay a higher interest rate on these types of loans than you would on a secured loan.
Most people have a mixture of both secured and unsecured debts, and both should be managed with the utmost care and concern. Someone who is just starting to rebuild a good credit history will have to prove themselves with a few, small, unsecured debt loans, by making timely payments, in order to qualify to apply to buy a home or a car via secured debt.