Before you apply for a new loan, our credit counseling advice is to understand exactly what that loan entails. First things first, what kind of loan is it? Is it a secured or unsecured loan? Understanding the difference between a secured vs unsecured loans can help you determine how to prioritize which bills to pay first, especially if you are struggling to pay off debt. Keep reading to learn more about secured vs unsecured loans!
What is a secured vs unsecured loan?
A secured loan is a loan that is attached to some sort of collateral. If you fail to make payments on this loan, your assets can be seized. A common type of secured loan is an auto loan. The collateral for this loan is the car. If you don’t make payments on this loan, your car can get repossessed. Another type of secured loan is a mortgage. As you may have guessed, the collateral with a mortgage is your house.
An unsecured loan, on the other hand, is a loan that does not have collateral. This means there is no asset to seize if you don’t make your payments. Student loans are an example of an unsecured loan. Though lenders can’t seize your college education if you fail to pay, there are other consequences. Lenders can send your account to a collection agency, which will dramatically decrease your credit score. They can also garnish your wages if you end up having to go to court.
Which loans should I prioritize?
Ideally, you want to make your payments on time and in full every month. That can be easier said than done when you’re going through a difficult time financially. During the COVID-19 pandemic, many Americans had to take a hard look at their budget and prioritize some bills over others. As a general rule of thumb, you should prioritize the necessities when money is tight. Things like food, housing, and medicine should come first. If you own a home, then you should consider your mortgage one of these priority payments. Additionally, if you absolutely need your car to get to and from work/school, your auto loan should also be prioritized.
For unsecured loans, like student loans, if you think you might have trouble paying them, contact your lender ASAP. There are many options available, including debt consolidation, student loan forgiveness, and other repayment plans. Because unsecured loans don’t have collateral attached to them, like your home or car, these can be lower on the priority list. However, you should not ignore them completely. It is important to contact your lenders if you are having trouble before you miss a payment!
If you are struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.