Knowing the difference between secured and unsecured debts is more important than you think. It can help you to prioritize paying off your debts. It can even help you borrow money or keep assets tied to your debts if you ever fall behind on payments.
This type of debt is backed or tied to an asset as collateral for the debt. This is to minimize the risk that comes with lending. Some examples of secured debts include mortgages, auto loans, and title loans. If you fall far behind or even default on payments to a secured debt, the lender can repossess or foreclose on the asset. If this happens, the asset can be sold at auction to cover costs. So, what happens if the amount obtained for the asset does not cover the cost of the asset? If this is the case, the lender might pursue you for the remaining balance of the debt.
With unsecured debt, there is no asset secured for collateral. Meaning, if you fall behind on payments, your assets will typically not be taken. The lender cannot take your assets without a court judgment. So, the lender can hire a debt collector and reach out to the credit bureaus (TransUnion, Equifax, Experian) to list your delinquent payment status on your credit report. Examples of unsecured debt include payday loans, medical bills, student loans, and court-ordered child support.
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