Secured Debt vs Unsecured Debt

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There are two types of debt consumers should understand. These debts are secured and unsecured. They are not the same kind of debts, and there are many differences between the two. Understanding what they are and how they benefit consumers makes it easier for consumers to avoid debt and live a life that offers more financial freedom. Before anyone tries to borrow money of any sort, they should understand the many differences between secured and unsecured loans.

Secure Loans

A secured form of lending is one that uses collateral. A mortgage and a car loan are good examples of loans with collateral. No one can buy a home without a mortgage that uses their home as collateral. If they stop paying their mortgage payments, the bank has the right to take their home from them using a process called foreclosure. It’s how the bank ensures they get their money back. 

  • Mortgages
  • Home equity lines of credit 
  • Automobile notes 
  • Secured personal loans 

With a secured form of lending, lenders are more likely to get their money back. Consumers aren’t as willing to quit making monthly payments on their home or car when they know it can be taken from them. The idea of ending up homeless or without a car is devastating, which is why lenders can offer lower rates when they offer secure forms of lending. On the slim chance a borrower decides not to pay back their portion of money owed, the lender has the legal right to remove them from their home or take their car, sell it, and make their money back that way. 

Unsecured Loans 

This is not at all like secured lending in which a lender has something tangible they can take from the borrower to sell and make money if the borrower defaults. With an unsecured form of lending, lenders take a much greater risk when they lend money to borrowers. They have no collateral. They lent money to people without anything they can take away and sell such as a home, piece of property, or a car.

  • Student loans
  • Credit cards
  • Utility bills
  • Medical bills
  • Payday loans 

Without any way of securing the money they lend, lenders usually offer these types of loans at a much higher interest rate. This the kind of lending that’s often associated with prime lending, such as credit cards for people with bad credit or even no credit. The rates are higher so lenders get as much money as they can from borrowers in case someone makes the decision not to pay it back. 

However, this does not mean it’s all right for consumers not to pay back their unsecured loans. They still report to the credit bureaus, so they will damage consumer credit scores. This makes it much more difficult for people to get a loan with a low rate whether it’s secured or unsecured. 

Which is Better?

It all depends on the consumer. Some cannot afford to take on a secured form of lending without any collateral, and others can only afford to take on secured lending options because of rates. Whatever the financial situation of every consumer, it’s always imperative they pay back all loans on time and in full when possible. 

Financial experts agree that anyone who loses their job and cannot afford to pay back all their bills should prioritize their secured debts first and their unsecured debts second. They can’t afford to lose their home or vehicle, which is why these are more important. 

For consumers in need of an emergency loan, BMG Money can help. BMG Money offers loans to employees, by working with their employers. There is no risk to your job, and it helps people avoid the high interest rates offered by payday loan companies. A simple phone call to 800.316.8507 or a visit to begins the process.