Is Your Debt Secured or Unsecured? What You Need to Know

When we need to take out a loan for our personal or business lives, we often don’t take the time we should to fully understand the consequences. People typically pay more attention to the payment terms and rewards options than to what happens if you can’t pay. It’s crucial that you understand the nature of your debt, even if it’s already too late to avoid a particular loan.

It all circles around whether or not you have to put up collateral. Collateral is a pretty common concept but one that people don’t always take time to consider. It’s something of values of yours, something that you promise to surrender if you can’t come up with the cash for your payment. It can be anything and everything.

Unsecured debt doesn’t require collateral. Think credit cards when you consider this kind of debt. There is nothing they can take from you, but so it poses a much lower risk. But it’s not risk-free. You will still see your credit score drop. And you will still have debt-collectors calling you. And it will be nearly impossible to get more capital when you are stuck. Secured debt does require collateral. These are your bigger loans that result in mortgages and other forms of property. When you fail to pay these bills, you see the same consequences: poor credit score, debt collectors, etc. But you see a much bigger consequence: you can lose your house or car. It’s a much higher-risk debt, but is often necessary to get you off the ground. The larger the loan, the more likely you have to pledge something.

At the end of the day, if all goes well and you’re able to pay off your loans, it doesn’t matter much if it’s secured or unsecured. But when you’re struggling, that’s when it’s critical you understand what you owe and what will happen if you don’t pay. Secured loans should always be the highest priority. Those are the ones you can’t take any chances on. It’s not advisable to miss any payments, of course, but if comes down to one or another, most advisors will put the secured loans at the top of the to-do list.

If your business is going to be successful, you have to take the risk of loans and debt. Very few people have the capital in their bank accounts to start their venture. But you need to give yourself the best chance at managing your debt and that requires knowing exactly what you’re agreeing to. If you haven’t taken out loans or are in the early stages of paying them back, you may want to consider reaching out to a financial planner. But keep in mind there are options for getting out of a tough situation without losing all that you have. Should your finances get to the point where you aren’t able to make even the secured-loan payments, you may want to consider reaching out to companies like National Debt Relief that can help you negotiate settlements and ensure you don’t lose your property along.