You may not know the difference between a secured debt or an unsecured debt. Knowing the difference between these debts is more important than you think. Understanding these differences are important to help you to prioritize paying off your debts, borrow money, and/or ensure that any assets tied to your debts will not be taken if you fall behind on payments.
A secured debt is backed or tied to an asset as collateral for the debt. This is done to minimize the risk that can come with lending. Examples of secured debts include mortgages, auto loans, and title loans. When you fall behind or default on payments, a lender can repossess or foreclose on the asset. If this occurs, the asset is typically sold at an auction to cover the 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.
An unsecured debt is not secured to an asset for collateral. This means that if you fall behind on payments, your assets will usually not be taken. Since your assets cannot be taken without a court judgment, 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.
What should you pay off first?
Knowing which type of debt to pay off first will largely depend on your situation. So, if you are having difficulty repaying your debts and are low on cash, you will want to make the secured debts your priority. This helps you ensure that assets like your home or car are safe.
On the other hand, if can make additional payments to your minimum balances owed to pay off your debt faster, paying off unsecured debt is better, as they often have higher interest rates. Remember, when you are in the process of repaying your debts, it is important to maintain at least the minimum payments on time for all your accounts.
Still have questions?
If you are not sure if you can keep up with your bills or find that you are becoming delinquent on your debts, call our office today for a free consultation.