What Is Secured Debt?

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Are you wondering about secured debt and how it compares to unsecured debt?

Whether you are working on becoming debt-free, you want to increase your credit score or learn more about your debt, understanding secured debt is essential. When you know what kind of debt you have, you can better understand how it affects your creditworthiness and the best way to manage it.

The two most common types of debt are secured and unsecured. Depending on your situation, you can apply and be approved for either type.

Although one type of debt is not better than the other, there are several differences between the two. If you are wondering what differentiates secured debt from unsecured debt, this short and simple guide is for you.

Collateral

The main difference between secured and unsecured debt is collateral. Secured debt requires collateral while unsecured debt does not.

Interest Rates

Did you know you can be charged different interest rates based on if your debt is secured or unsecured? It’s true, secured debt typically has lower interest rates than unsecured.

Borrowing Limit

One of the many differences between secured and unsecured debt problems is the borrowing limit. Because of the collateral you provide, you will likely have a higher borrowing limit with secured debt than unsecured.

Qualifications

Typically, unsecured debt requires you to have a certain credit score, credit history, and creditworthiness. Because you provide collateral for a secured loan, you don’t need to meet as many qualifications.

Repayment Terms

Unsecured debt tends to have shorter repayment terms. This is because you don’t have anything to secure your loan for the long term, such as using your home to secure a 30-year mortgage. This results in shorter and more restrictive repayment terms for unsecured debt.

Counterparty Risks

The risk for defaulting on an unsecured loan is much higher than a secured loan. This is because borrowers tend to do everything they can to avoid defaulting if it means losing their collateral, such as a home or vehicle. If you are wondering what to do if you can’t repay secured debt, consider hiring a bankruptcy attorney to determine what your options are.

Additional Benefits

Because of the nature of secured debt, this type of debt generally comes with additional benefits. Your secured loan might come with access to credit monitoring and more, to help you boost your creditworthiness overall. For this reason, getting a secured loan can be a great way to improve your credit score.

These Are the Differences Between Unsecured and Secured Debt

There are several differences between unsecured and secured debt.

Some of those differences include the need for collateral and the interest rates you will be charged. You might also notice differences in borrowing limits, qualifications, and repayment terms. The risks vary and one form of debt comes with added benefits.

These are the differences you will experience between secured and unsecured debt.

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