Different types of debt exist, and it is important to understand the differences between each type.
Of the types of debt, secured and unsecured debt are among the most important to fully grasp and understand. What differentiates the two?
Secured debts
The National Foundation for Credit Counseling discusses the differences between secured and unsecured debts.
First, by definition, a secured debt will take a security interest as collateral. In short, the creditor will take steps to ensure that they will get paid even if a person cannot repay their debts. They take a security interest to do this.
The security interest differs from contract to contract, but typically involves some sort of property or asset that the individual essentially promises to give to the creditor if they cannot pay back their debt.
As an example, if a person buys a new car, the car itself is often collateral for the auto loan. In short, if the person pays off their debts, they own the car. If they fail to pay off the debt, the creditor may invoke their security interest and take the car back.
When the collateral does not cover the full cost of the original debt, the creditor can take a person to court to get a deficiency judgment for the balance of the loan.
Unsecured debts
As for unsecured debts, these do not come with collateral, and thus, the creditor cannot take property without a judgment. Medical bills, personal loans, credit cards and student loans often fall under this category.
While unsecured creditors cannot take property or assets without a court order before taking action, it is still important that people do not avoid paying unsecured debts because it can lead to further legal actions.