Personal Debt Management: Understand the Difference between Secured and Unsecured Debt

A Credit Article Contributed by Brandie King

When dealing with management of your personal debt you need to understand the difference between secured and unsecured debts. The following article will definite both secured and unsecured debt, as well as list different types of secured and unsecured debts, to help you understand them during the management of your personal debt.

Personal Debt Management: Definition of a Secured Debt

A secured debt is one where an asset, such as your house, your car, or a high ticket item such as a boat, was used as collateral to obtain the account. When a debt is secured the creditor has the right to take away the asset used to secure it if you do not pay the debt.

Personal Debt Management: Types of Secured Debt

The two basic types of secured debt are home mortgages and car loans, for obvious reasons. Second mortgages, home equity loans, and home equity lines of credit are also secured debt. Boats are usually secured debt. Some finance company loans might be secured. Commercial loans are secured if the inventory and receivables of the business were used for collateral. In addition, some store purchases will be secured debt. If you have a store charge card or account, read the agreement you signed when you opened the account to see if purchases are secured.

Personal Debt Management: Secured Debts Can Become Unsecured Debts

When you fail to pay what is owed on a secured debt the creditor will repossess whatever what used as collateral and will sell it to pay off the balance you owe them. If there is a remaining balance to be paid after the asset has been sold and the proceeds have been applied to the balance on the debt, you will be liable for that remaining balance. The remaining balance then becomes an unsecured debt because the asset used to secure it in the first place has already been repossessed and sold.

Personal Debt Management: Definition of an Unsecured Debt

An unsecured debt is one where you were not required to put up an asset as collateral. If you do not pay an unsecured debt the creditor has no other recourse but to pursue legal action. Unsecured debts normally have much higher interest rates than secured debts because of the fact that no assets were used to secure the debt, and therefore there is nothing for the creditor to repossess and sell to pay back the debt.

Personal Debt Management: Types of Unsecured Debt

The main type of unsecured debt is credit cards. Open accounts at department stores are also usually unsecured debt, especially for small ticket items. Personal loans, medical loans, and student loans are all types of unsecured debt. Old unpaid utility bills and legal bills are unsecured debts. Commercial and business debts obtained without having to put up inventory and receivables as collateral are unsecured debts. A few other types of unsecured debts include back child support, taxed, gas cards, and bank lines of credit.