Most of us are familiar with the term debt, which is defined as the money or goods owed by one person to another. In general, debt involves money that is borrowed by a person or organization from another. The money owed by the borrower to the lender is called a debt. Today, debts come in many different forms like mortgage loan, auto loan and credit card debts. Basically, debts are classified into different types like the secured debt and unsecured debt.
Secured Debt and Unsecured Debt
As the name rightly suggests, a secured debt is a debt that is secured by an asset. In this type of debt, the borrower pledges an asset, which forms the collateral for the loan. In case of default in loan payments, the lender can satisfy the remaining debt amount, by selling off the collateral. Some of the common examples of secured debts are mortgage loans and auto loans. In case of mortgage loans, the loan is secured by keeping real property as collateral. Home loans are among the common examples of mortgage loans and in this case, the borrower pledges the property as the collateral, in lieu of the loan issued by the lender. For the lender, the loan is secured with an asset that can be used, in case of defaults in loan payments. The asset can be sold (as in foreclosure) and the proceeds can be used to cover the remaining debt. In case, the sale of the asset fails to raise enough money to cover the debt, the lender can always obtain a deficiency judgment, which requires the borrower to pay the remaining debt amount.
However, secured debt or loan is beneficial for both the borrower as well as the lender. These loans are often found to charge lower interest rates, as the risk of the lender losing money is very low. The lender can always cover the debt with the collateral. This is not possible in unsecured debts, in which, there will be no collateral. One of the classic examples for this type of debt is personal loans. As there is no collateral, the loan is issued on the basis of the promise made by the borrower regarding debt repayment on time. As this is a high-risk loan, the interest rates too are high. Another example is credit card debt. Even in case of credit cards, there are instances where secured credit cards are issued. This happens, when someone gets bankrupt and wants to rebuild the credit. But, in case of unsecured debt, the lender does not have any right to seize the assets belonging to the borrower, for satisfying the debt. However, the lender can obtain a legal judgment against the borrower, for the same. How to reduce a secured debt? As we all know, debt payoff in parts is the best method, so that the interest you are paying will be reduced.
What is secured Debt Consolidation
If you have multiple secured or unsecured debts and you are finding it difficult to pay on time, you may apply for a debt consolidation loan. It is nothing other than a loan that can help you in paying back all existing unsecured/secured loans. A debt consolidation loan can be an unsecured one or a secured one. While an unsecured debt consolidation loan may be difficult to get, secured debt consolidation may be available to those, who have assets, like, real property, that can be used as a collateral. Even though, real property is the most preferred asset for a collateral, even jewelry, stocks and bonds and other personal belongings can be used for the same. The amount of loan issued by the lender may be based on factors, like, the value of the assets pledged by the borrower, the term of the loan and interest rates. As compared to unsecured loan consolidation, a secured one is always preferred for the low interest rates. While, debt consolidation is beneficial in many ways, it is always better to consult the financial adviser, before opting for such loans.
The above said is only a brief overview about the various aspects of secured debt. If you have any plans for securing loans, then, it is always better to consult a financial analyst and get his opinion about the same.
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