You apply for a loan or other type of finance with a lender but perhaps you do not know what type of loan it is. There are two main types of debts: secured and unsecured. Do you know which is which? Knowing the difference may help you to prioritize your debts and choose your debt consolidation options better.
Secured debts
These debts — owed to a financial institution — are tied to one of your assets. A lien is placed on the assets, which means the lender may take back the asset when you fall behind on payments. The lender will try to find out if the asset will cover the debt. If the value of the asset does not match that of the debt, the lender may ask you to pay the difference in value.
Property and vehicle loans are some of the common types of secured debts. There are also secured credit cards for those with poor credit.
Unsecured debts
Lenders do not need security on unsecured debts. These types of debts are normally credit cards, persnoal loans, medical bills and court-ordered child support. Should you not be able to make repayments on these bills, the company has few options. They may not confiscate any of your assets; however, there are other actions they may take. They may hire a debt collection agency. This agency will try to get you to pay the money. This method may work but if it doesn’t, the lender may sue you in court. The court will enforce a garnish order: your salary will be used to pay the amount you owe. Should this not be applicable, the judge may rule that one of your assets be sold, or that a lien is put on an asset until you repay the debt.
How can any one not know if a debt is secured or not?
Everyday we speak to people unsure if a particular debt is secured or not. In most cases the finance is with regards to a car or other high value item. If you’ve borrowed money from your bank or other lender then take that money to buy whatever, then that debt is not secure on the item bought.
If other the other hand you’ve signed a credit agreement at the car showroom, then debt is likely to be secured on the car. In some cases, a unsecured debt can be converted to a secured debt by a court process called a charging order.
Items bought on credit
Items bought on credit can potentially be taken back if the terms of the credit agreement are broken and alternative payments are not agreed. However, this may not be practical depending on the goods in questions. For example a fitted carpet would be little use to the carpet store once it has been laid a a custumer home for premise.