In modern finance, there are two main types of debt: secured and unsecured. Secured debt refers to debts backed or secured by collateral assets. If the borrower defaults on a secured debt, the lender can repossess the collateral, sell it, and use the proceeds to complete the payment. Because secured debts are tied to an asset, the lender has a better chance of getting repaid for the debt should the borrower fall behind on the payment. Examples of secured debt are mortgages, which are secured by real estate, and car loans, which are secured by vehicles.
Unsecured debt, on the other hand, is not protected by collateral or a guarantor. Should the borrower fail to meet the repayment terms for an unsecured debt, the lender does not have any right to liquidate the assets of the borrower to pay for the debt. There’s no security tied to this type of loan, so lenders typically scrutinize the borrower’s creditworthiness before approving an unsecured debt. Also, unsecured debt gets charged relatively higher interest rates, partly because collecting payment for it may take up a lot of the lender’s resources. Examples of unsecured debt include personal loans, credit card debt, and hospital bills.
On the surface, you may think that unsecured debt is the type that you could throw to the back burner if things ever get tight financially. Some folks even assume that they can run away from it when they stop caring about payments. Unfortunately, that couldn’t be a more misguided notion. Your creditors may not be able to wrangle you in physically, but they can inflict damage in a different way.
How Unsecured Debt Affects Your Financial Future
As mentioned earlier, creditworthiness is an important aspect when applying for unsecured debt. Good credit is what institutions check if they want to know your creditworthiness. The better your credit, the more likely you are to get approval for other loans that are more substantial, like housing and car loans. Your credit health not only affects loan approvals, it also has an effect on the amount of interest that you will have to pay on these loans. The better your credit, the lower your interest rates will be.
This is where unsecured debt and your financial future are linked – via your credit health. Your credit health will show lenders your risk level when it comes to borrowing and paying off loans. If your credit is bad, there is a huge chance that you won’t be able to get the loan you are asking for.
Making Amends: Dealing with Unsecured Debt
Incurring a large amount of unsecured debt may make your financial future seem dismal, but you shouldn’t despair. If becoming debt-free in the shortest time possible is your top priority, then debt settlement is your best option. Debt settlement gives you the chance to completely pay your debts at an amount that is lower than what you originally owe, usually within the span of 24 to 36 months.
Your debt settlement agency will negotiate with your creditors on your behalf. Typically, the goal of these negotiations is to considerably lessen the total amount of your debt in exchange for a lump sum payment. After the creditor agrees to a discount, your debt will be paid off for much less than you owe. Therefore, you once again have the chance of rebuilding your credit and a healthy financial future.
Getting deep in unsecured debt may not be a conscious action but getting out of it will require a lot of work on your part. This is why care should always be taken when you swipe your credit card or when you take out personal loans. Always keep in mind that what you are buying now with your card and those loans that you are taking will have an impact on your financial future.
To learn more about debt relief solutions and how to start living with financial freedom, contact CreditAssociates for a free consultation or use our Savings Calculator to see how much you could save.