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Credit Verus Debt
Secured and unsecured debt - what's the difference?
It's easy to just think that debt is just debt, but in
reality, there are different types of loans, and it's important
to know what which type you have.
You will need to understand the differences in order to be a
good money manager, or, if the worse happens and you find
yourself turning to credit or debt counseling, you'll need to
understand how different types of debt can be handled. Let's take
a look at two types of debt; secured and unsecured loans.
Secured debt is a loan that has something attached of value
attached to it-this is called collateral. The most common
examples are car loans and mortgages.
Collateral can be cash or the item (or items) that you
borrowed in order to get. (For example, your car.)
With secured debt, if you fall behind on your payments, the
collateral can be repossessed and the lender will sell it in
order to collect the money that they are owed. But that doesn't
always put you in the clear, in reality, even if the collateral
has been repossessed or foreclosed on and sold, you may still
remain liable for any balance remaining until the entire amount
of the loan is paid off.
Additionally, with secured debt you cannot negotiate payments
or any restructuring through credit counseling, and oftentimes
you won't be able to discharge the debt by filing for
bankruptcy.
On the other hand, unsecured debts act totally different. Most
people associate unsecured debt with a credit card or a personal
loan without collateral. But it can also be a commercial debt or
a medical debt.
Essentially, this type of 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, and the creditor has no
assurance - other than your agreement to repay on pre-determined
terms - that they will get paid.
If you fall behind on one of these debts, a lender can send
your account into collections and take legal action. More often,
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. The bankruptcy laws are
changing.
Because of the lender's risk factor, you will generally pay a
higher interest rate on these types of loans.
Most people have a mixture of both secured and unsecured
debts, and both should be managed with the utmost care and
concern. Many times, someone just starting to build their credit
history will have to prove themselves with a few, small unsecured
debt loans and re-payments in order to qualify to buy a home or a
car (secured debt).
But overall, the most important thing is to treat each one as
it is; a potential good mark that will improve your credit
rating.
Article from http://www.nothing-but-info.com
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