Over time, we accrue many different kinds of loans – mortgages, credit cards, car loans, medical bills, for example – the list goes on, and with children thrown into the mix, debt can increase significantly and often get out of control.
When examining your expenses, it’s important to note the key differences between unsecured and secured loans, and how each affect your repayment in the short and long term. Why? Because how these loans are handled in the event of insolvency or missed payments differs between banks, advisors, and collection agencies. You also need a different approach in the event you go to a credit counsellor or declare bankruptcy.
If you have overwhelming credit card debt, that paints a different picture than if you weren’t able to make your mortgage payments. Knowing the difference between the two will help you figure out how to resolve your debt problems, and liberate yourself from the shackles of interest and a damaged credit score.
Let’s explore the differences, and see how each can affect your credit:
Unsecured Loans
An unsecured loan is a loan that isn’t backed by an asset, like a house; it's just backed by your creditworthiness. There’s no collateral needed for these kinds of loans, so having a great credit score is essential to being approved.
Examples of unsecured loans are as follows:
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Credit cards
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Personal or business loans
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Lines of credit
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Student loans
Unsecured loans typically come with higher interest rates because lenders have nothing to fall back on in case you default on your payments. Because they are providing funds based on your credit score and successful financial history (rather than an asset), creditors run a bigger risk if you don’t end up repaying them back. Depending on the type of unsecured loan you’re taking on, the approval process can be lengthy due to the degree of risk that’s being taken.
Unlike secured loans, you won’t have any collateral repossessed from you if you’re unable to pay off the debt. For instance, if you bought a new refrigerator with your credit card, the company won’t seize the appliance if you don't keep up with your payments. Instead, you’ll be slammed with late fees and exorbitant interest rates, which can make climbing out of an unsecured debt hole difficult. Your credit score will also take a hard hit, which will make it difficult for your to get a loan or line of credit in the future. Rebuilding or repairing your credit score can also take a lot of time, especially if any debt ends up in collections. (More on how to stop collection calls here).
Secured Loans
Unlike unsecured loans, secured loans are backed or protected by an asset or collateral, such as a house or a car, which can be repossessed if you should default on your payments. So for example, if you buy a car, that car can (and will) be used as collateral, and if you defualt on payments the lender can repossess it to recoup their losses. In cases where a home or car is used as collateral on a loan, the lender will hold the deed or ownership title until you’ve completely paid off said loan.
Oftentimes, a secured loan is the most common way to obtain a large loan from a lender, such as:
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Mortgages
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Auto loans
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Some business loans
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Home equity lines of credit
As you’ve probably guessed, it’s impossible to default on your payments on a secured loan and still keep the asset the loan is secured by. So if you’ve bought a house but are unable to pay, the bank can seize the house back to reimburse the money loaned out. Secured loans usually have lower interest rates, but the length of the loan is for a much longer period of time than unsecured loans.
In terms of collateral, other than the item and/or property itself in question, stocks, bonds, additional property, and cash can be used to repay your secured loan.
While creditworthiness isn’t taken into account as much, it's still something the lender will consider when evaluating your loan application. While banks will take your current income and credit history into account, secured loans are typically easier to obtain for people whose credit rating and credit score aren't in the best standing.
Get the Help You Need
Are you wondering about your debt, and what actions you should take to pay it off? Having trouble making payments, and worried you’ll have your property seized from you? It’s important to get in touch with a certified credit counsellor who can take a look at your all your debt, including your secured and unsecured loans, and provide you with actionable options to help stop collection calls, stop the stress and anxiety, and get you on the way to a better life.
Debt is something we all face – so don’t face it alone. Feel free to contact us for a free debt assessment where a certified credit counsellor can give you all your debt solution options! There's no obligation – you choose what's best for you – and it's 100% confidential. Call us at 1.800.267.2272 to book your free appointment.
