Unsecured vs. Secured Debt: Which is better?
The difference between unsecured and secured debt is simple. Unsecured debt, such as credit card debt, is not attached to a tangible item. Secured debt, such as a car loan, is attached to a tangible item; in this case a vehicle. What difference does this make? Is one type of debt better than the other? There are pros and cons of both types of debt. But of course, you should realize that you will probably get involved with both types at some point in your life.
The biggest benefit of unsecured debt is that it is not tied to a particular item such as a car or home. If you default the creditor cannot take anything from you. Yes, they can ruin your credit score but in the end they cannot come and take something that is yours.
On the other hand, secured debt is a bit more of a risk. Take for instance a car loan. If you do not pay what you owe, your lender has every right to repossess your vehicle. They can show up at your home and take what you think is yours. The same holds true with a mortgage; this is known as foreclosure.
You never want to roll unsecured debt into secured debt. An example would be paying off your credit card debt with a home equity loan. When you do this you are getting rid of your credit card debt, but at the same time you are putting your home in the line of fire. If you don’t pay your home equity loan it is your house that is now at risk instead of just your credit score.
Most people agree that unsecured debt is the better of the two. That being said, you shouldn’t avoid secured debt as this is often times necessary to live a comfortable life.
