'Debt' is a familiar term, 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 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 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 real property as collateral.
Home loans are among the common examples of mortgage loans, and in such cases, the borrower pledges the house as the collateral, in lieu of the loan issued by the lender. For the lender, the loan is secured by the house, that can be used, in case of defaults in loan payments. The asset can be sold (as in foreclosure) by the lender, and the proceeds can be used to cover the remaining debt amount. 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, a secured debt or loan is beneficial for both the borrower as well as the lender. These loans are often associated with low 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 loan. As there is no collateral, the loan is issued on the basis of the promise made by the borrower regarding timely debt repayment. 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. However, in case of an 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 get 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 to pay 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.
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 determined on the basis of factors, like the value of the assets pledged by the borrower, the term of the loan, and the rate of interest. As compared to an 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.
Disclaimer: This article is for informational purposes only, and should not be used as a replacement for expert advice.