Published On: Mon, Jul 8th, 2019

Unsecured Debt vs. Secured Debt

Although seemingly very similar, unsecured debt and secured debt are completely different. The most serious distinction is that defaulting on a secured loan normally costs someone their home. Gaining an understanding of the pros and cons of secured debt and unsecured debt is critical before signing a loan agreement.

Why Do Borrowers Seek to Consolidate Debt?

Borrowers consolidate debt, such as unsecured loans and credit card debt, because it allows them to simplify their finances. It also means that a borrower can spread repayments over a longer period. Having a defined term has numerous advantages over credit card debt where no defined term exists.

What is the Difference between Secured Debt and Unsecured Debt?

The difference between unsecured debt and secured debt is that the latter places a second charge on the property. A second charge means that the lender receives their money from either a voluntary property sale or repossession.

Financial institutions are willing to lend larger amounts with homeowner loans because they are a source of collateral. Whilst unsecured loans are available for up to £25,000, it is possible to get a secured loan for well over £100,000.

Why Unsecured Loans are Normally the Preferred Option

Unsecured debts, such as credit card debt, are vastly less likely to result in the loss of the family home. In the event of financial hardship, it is normally possible to reach an agreement to pay a lower amount to a lender until the balance is settled. Others manage to reach ‘full and final settlements’ with lenders for lesser amounts.

Unsecured Debt vs. Secured Debt

Are There Any Negatives to Unsecured Debt?

Although less likely, some lenders have been taking out charging orders so they can get their hands on the proceeds of a property sale in the event of loan default. However, it is possible to pursue a debt solution, such as an Individual Voluntary Arrangement, in order to prevent a charging order ever happening,

Why Do Borrowers Choose Secured Debt?

The most common motivation for applying for a secured loan is that someone needs more than is available via an unsecured loan or bad credit is an issue. Bad credit history makes it very difficult for borrowers to get an unsecured loan, except at very high rates of interest to reflect the risk presented to the borrower.

Before choosing to consolidate debt, see if it is possible to get an unsecured loan. Try to avoid secured debt as it gives lenders far greater powers to recover money. Those struggling to make repayments should consider a debt solution which may mean that interest is frozen or the debt is written-off.

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About the Author

- Paul Linus is an eminent online journalist who has been writing news, features and editorials on different websites from across the world for about a decade. He can be contacted at knowledgeherald@gmail.com

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