The Difference between Secured and Unsecured Debts

There are two main ways of distinction between different kinds of debts. One is a secured debt while the other is unsecured. Paying off secured debts is usually more important than paying off your unsecured debts. You’ll understand this once you understand the difference between secured and unsecured debt.

Secured Debts

Secured debts are those kinds of loans that are backed by some kind of an asset that is used as collateral for the loan. For a secured in debt the creditor places a lien on the asset and agrees to give the loan while considering the asset as a guarantee in case of non-payment. This means that the creditor has a right to take the asset and sell it to recover his money in case the consumer does not follow the repayment plan. The creditor has the right to take possession of the asset and sell it in case you become delinquent on your loan. In case the sale of the asset does not completely cover the debt, the creditor can hold you responsible for the remaining amount of money and can pursue you to recover that some of money. Common examples of secured debts are automobile loan and a home mortgage loan where your automobile and your home are collateral is on the loan respectively. The creditor reserves the right to take possession of your automobile off your home in case you go delinquent on the loan account to recover his investment.

Unsecured Debts

Unsecured debts are the opposite of a secured a debt which means that it is the loan even on a personal guarantee with no asset being provided as collateral. In an unsecured debt the creditor has no right to take possession of your assets directly in order to recover his money. The creditor however does maintain the right to transfer or sells your account to a collection agency for the purpose of recovery or sue you in a court of law which may result in a judgment that allows the creditor to garnish your wages or take an asset to recover his investment. A common example of an unsecured debt is the balance on your credit card. Other unsecured debts include student loans, medical bills and court-ordered child support.