2 Types of Debt- And How It Can Hurt You If You Don't Know Them



Debt can be divided into two (2) categories:

Unsecured debt

and...

Secured debt

What's unsecured debt?

It is when you, as the borrower takes out a loan that is not collateralized by any asset, whether it is personal or real estate property.

Example: credit cards, unsecured personal loans (not tied to anything), medical debt.

What's secured debt?

It is when you, as the borrower takes out a loan that IS collateralized by an asset such as a real estate property, or an automobile.

Example: mortgages, home equity line of credit, car loans, special credit cards, equipment loans.

What are the pros and cons for unsecured debt?

Pros:

* Creditors can't take any of your stuff

* Usually easier paperwork

* faster to get (with a good credit score)

* readily available

* multiple uses

Cons:

* usually higher interest rates

* end up paying more in fees

* misuse if not careful

* harder to get

What are the pros and cons for secured debt?

Pros:

* lower interest rates

* lower fees

* easier to get (despite low credit score)

* Banks are more willing to lend

* Different types

Cons:

* Creditors can repossess property or foreclose on a property

* Financial loss on having to pay something that gets taken away

Distinguishing your debts and classifying them into secured and unsecured debts are important.

You will have more to lose financially and materialistically if you ignore paying secured debts.

Secured debts relate to any loan or credit that was obtained by granting your lenders to put a lien on a piece of valuable property that you own.

These properties include your home, car, boat and even expensive jewelries. Be wise and see if you can avoid debt altogether, and if not decide whether unsecured debt is the way to go (provided you can pay it off quick due to its higher rates) and if not make sure you can make payments on the secured debts.