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Debt Consolidation: Consider the Difference Between Unsecured and Secured Debt

Written by Banks Editorial Team

Updated November 8, 2020​

2 min. read​

Knowing the difference between unsecured and secured debt is important if you are looking at ways how to save money refinancing or consolidating your debt. We all know that debt is a bad thing for frugal management of our finances. However, have you ever considered the variation in debt and what it means for your bank account? Unsecured and secured debts are two very different things, and depending your unique situation, can have different effects on how you move forward with debt consolidation. Like most Americans, you probably are unaware of the different classification. That’s perfectly fine; we’re going to look over the difference right now.

By refinancing your debt, you can agree to better terms and save money in the process.

Difference Between Unsecured and Secured Debt

So what is the Difference between unsecured and secured debt? A secured loan is a loan that is attached to something, otherwise known as collateral. This guarantees the loan and means that if you are unable to pay the loan that the item secures, the debt will stand good for the loan still. Banks have to take less of a risk on you with secured loans, and as such, offer lower interest rates as a reward.

An unsecured loan, on the other hand, has no collateral. This means that the interest rate will be higher because the bank is taking a bigger risk on the loan. When you do not pay, the bank has no collateral to collect as recourse. They can then sue you for lack of payment, but they cannot take your home or car, away from you.

Unsecured to Secured Debt

Now that you know the difference between unsecured and secured debt,  know that transferring unsecured debt into secured debt can be a dangerous debt consolidation move today. If something happened to you and you fell behind on your credit card bills, the banks could sue you for payment. However, your home would be safe, so long as you stayed current with your home payments. If you had paid off those bills with a home equity line or other options, but were still unable to keep up with payments, then the bank has recourse and can take your home away to pay off those debts.

Furthermore, if you were to declare bankruptcy, you can work it out so that you can keep your home while reassuming the debts attached to your home. The danger of this kind of movement is that you are opening yourself up to worst-case scenarios in situations that are already unfavorable and uncomfortable.

Debt Consolidation

Alternatives to getting your debt under control don’t need to involve moving from unsecured to secured loans. You can set up a debt payment plan and work to pay off your debt that way. If you choose to pursue a debt consolidation loan, make sure it is not attached to your home so you are protected in the future.

To get started, you need to write down a budget and really analyze your income and savings. You need to come up with extra money that can be put towards you debts. By doing this, you’ll prevent yourself from running the money back up on your credit cards. However, be careful as you consolidate, because if you do not change your spending habits that got you in trouble in the first place, your debt will continue to mount.

Take care of your debt and finally relax. Get started today.

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