Talking about debt, most of us consider it a negative financial behaviour, while it is not. Well, positive or negative, if you have taken a debt, you need to pay it off – every financially responsible person is going to say the same thing.
Now, most of us are not even aware of the different kinds of debts and its pros and cons, which makes us so naïve while borrowing debt. Speaking of that, I am sure most of you have heard of unsecured and secured debt. However, only a few of you are comprehensively aware of its advantages and disadvantages. For the rest of them who are yet to discover, here’s a detailed dig on it. Let’s begin!
Credit card bills, student loans, and medical bills are common examples of unsecured debt. So, what makes it different from other forms of debt or secured debt? They do not have any collateral backing it up. This means, if there’s any default during the repayment, the lender has no right to seize any kind of property to recover his/her lost investment.
Exactly why unsecured debts possess higher interest rates. People usually consider unsecured loans when they are in dire need of money but does not want to risk any of their personal property/assets. They are quick in nature but can also negatively affect your credit viability.
Exactly the opposite of unsecured debts, secured debts are backed up by property or other assets. Thus, if you default the repayment of your loan, the lender can rightfully seize the collateral. Now since this kind of loan is less risky for the bank, their rates of interest are lower than unsecured debts. The banks are more flexible because, in case of delinquency, they can sell the collateral and make up for the losses.
Further, secured debts can be divided into two parts. A quick summary of each part will help you understand better:
1. Consensual loans: This the most popular secured debts, in case of consensual loans, the borrower agrees to put up his property as collateral.
2. Non-Consensual loans: In these loans, the creditor files a money judgement against you. It can also be a tax lien that has been placed against your property because of your failure to pay taxes.
Now that all of you are aware of the definition of secured or unsecured debts in detail, let’s move on to the most important part of this content piece:
Unsecured or secured, which is better?
I explained above how both these debts differ in the collateral aspect, and why unsecured debts have higher interest rates than the secured debts. Plus, if you have a good credit history, you can avail of the loans at even better rates and returns. For secured loans, the terms of repayment are also longer than that of unsecured loans. That’s why a home loan can be repaid within 30 years through a 30-year fixed mortgage rate, but a credit card debt needs to be repaid within a year or a half.
Thus, when the discussion is about choosing between the two, a secured loan will always be a better option for those with poor credit histories or new credit histories. If you suffered a financial hardship lately, a secured loan will also help you improve your credit background. On the other hand, unsecured loans can be considered when you are sure of your repayment plans. There’s one golden rule for borrowing debts that everyone must follow: Never borrow more than you can pay.
If you wish to prioritize these debts on the basis of repayment, it’s always better to pay off debts with higher interest rates first. If you wish to save the accumulating interest, start paying off the loans with the highest rate followed by the second-highest and so on.
However, if you are on the other end, that is you are the lender and your consumers refuse to pay off the debts despite several requests and warnings, you can consider help from some expert debt collection agencies like Cedar Financial. They are well-equipped with the pros and cons of different types of debts and equips the clients with the same and in the process attempts to recover your debts in maximum amounts. One can know about the overall strategy behind debt collection agencies from here.