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Secured vs Unsecured Debt: What’s the Difference?

secured vs unsecured debt

Getting rid of debt is a priority for many people looking to achieve financial freedom. However, not all debt is created equally. Though you should pay all your debts on time every month, the consequences for becoming delinquent on different debt payments can be vastly different. There are two main types of debt, so let’s go over the differences between secured vs unsecured debt:

Secured Debt

Secured debt is the type of debt that involves collateral. This means that if you don’t make your payments, lenders can seize an asset that serves as collateral. A common type of secured debt is an auto loan. If you miss your payment, your car could get repossessed. Mortgages are another example of secured debt. If you don’t pay your mortgage, you could face foreclosure on your house. Additionally, your missed payments will be reported to the credit bureaus.

Unsecured Debt

As the name suggests, this type of debt is not secured by any collateral like a secured debt is. If you aren’t making your payments, there is nothing that a lender can seize, such as a car or a house. Unsecured debts include credit card debt, medical bills, and student loans. So what are the consequences of, for example, not paying off credit card debt?

  • Your delinquent payment status will be reported to the credit bureaus, so this will show up on your credit report and hurt your credit score. This means if you could be denied for new lines of credit or have higher interest rates.
  • Your wages could be garnished. Wage garnishment is when a portion of your paycheck is withheld to pay off your debts.

Secured vs Unsecured Debts: The Bottom Line

Obviously no matter what type of debt you have, it is in your best interest to make the payments every month. You don’t want to lose your house or car, and you wouldn’t want to have your wages garnished either. The bottom line is, being delinquent on both secured and unsecured debts can hurt your credit score and have serious financial consequences.

If you struggle with managing debt, ACCC can help. Call 800-769-3571 today to speak to one of our certified credit counselors!

ABOUT AUTHOR / Madison

Madison is a Marketing Communications & Programs Associate at ACCC. She is excited to share her tips on saving money and being financially responsible here on the Talking Cents blog!

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