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Understanding how secured and unsecured debt differ

Many people may consider all debts equal. However, there may be significant differences in debts and how they may impact a person’s credit rating or financial stability.

Consumers facing serious debt challenges or coming out of a recent bankruptcy and wanting to rebuild their credit should learn about the different forms of debt and what they mean for them and their options to address their needs.

Understanding secured debt

The Ascent by the Motley Fool explains that a vehicle loan or a home loan allow a creditor to repossess a tangible item should the consumer fail to pay the required payments. For this reason, these types of debts are referred to as secured. The consumer assumes a greater level of risk with this type of debt as they may lose their assets if they cannot pay their debt. The interest rates on these types of debts may be more favorable to the consumer.

Bankrate notes, however, that some secured debts may not result in asset repossession, but instead a lien or other judgement against a person. These secured debts are called non-consensual. A consensual secured debt is connected to an assessed that can be taken by the creditor.

Understanding unsecured debt

Medical bills, student loans and most credit card debts are forms of unsecured debts as no tangible items exist for a creditor to repossess when a consumer fails to pay. Because the creditor takes on a greater level of risk with these types of debts, the consumer may pay a higher interest rate than compared with the interest rate on a secured debt.

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