When considering consumer debt there are two principle types. These are secured debt and unsecured debt. Knowing the difference between the two enables consumers to better manage their debt repayment. This is because each type of debt gives the lender different rights and privileges on how they can secure what they have lent in an event of defaulted debt repayment or borrower bankruptcy.
This type of debt refers to loans that were taken from a lender with attached collateral such as a property, a home or any other asset. Having placed a lien over the collateral enables the lender the right to acquire the property in an instance where the borrower fails to adhere with the loan repayment agreement. A similar thing could happen in instances where the borrower files for bankruptcy in which case the secured loan creditors will have the ability to replenish their credit through the proceedings generated by liquidation of the secured assets. However, in instances where the same property has been made use of as collateral for more than one secured debt, the right for the collateral will be determined based on the lenders involvement in which case the primary lender will get the priority as against any secondary lenders.
Example for secured debt includes housing mortgages and vehicle loans in which case the vehicle will act as the collateral. At the same time, these loans will be given at a competitive interest rate and probably with less tight restrictions than it is with an unsecured loan purely because of the security for its lender.
Unsecured debt is the debt that does not have a security or collateral attached to it and was given based on the credit worthiness of the borrower. Credit cards are one such example of an unsecured loan along with student loans given without any collateral. Although these loans are easy to acquire and do not always involve much documentation, they can have a higher interest and more terms and conditions related to repayment and for defaults.
However, in such debt the lenders do not receive any rights over borrowers’ assets as against what happens in secured debt. Therefore, in an event of payment default, the lenders will seek legal assistance to acquire some of the borrowers’ assets in order to cover the debt. But, if the borrower files for bankruptcy, the unsecured lenders will not get priority over secured lenders, but will have to settle for what is left over after the secured debts have been repaid.