Secured versus unsecured debt. What is the difference? Isn’t it simply debt? For many people, debt is all the same. Whether you owe a car, a house, or hundreds of credit cards, it’s all bad and stressful. But what if we told you that not all debts are bad? And that the debt you deem “good” and many Americans have is classified as “unsecured debt”?
This blog will examine why credit card debts are called unsecured debt and what you should do if you have too much of it.
Secured Vs. Unsecured Debt: What’s The Difference?
When you borrow money, you’ll usually encounter two main types of debt: secured and unsecured. But what sets them apart?
Secured Debt
Secured debts are loans tied to an asset you offer as collateral. If you can’t pay, the lender can take that asset to cover your debts. Because secured loans are less risky for lenders, they often come with lower interest rates and better terms.
Common examples of secured debt include auto loans, mortgages, home equity loans, and home equity lines of credit (HELOCs). For instance, with an auto loan, your car is collateral, so the lender can repossess it if you default. Similarly, with a mortgage or home equity loan, missing payments could lead to foreclosure on your home.
Unsecured Debt
Unsecured debt doesn’t require any collateral—no asset backing it up. If a borrower defaults on unsecured debt, the lender can’t immediately seize property but may take legal action to recover what’s owed.
These loans are approved based on the borrower’s creditworthiness and promise to repay, so lenders often charge higher interest rates for them. Since there’s no collateral, the risk to the lender is more significant. As a result, unsecured loans usually come with stricter requirements, like a strong credit score and a low debt-to-income ratio, making them available only to financially stable borrowers.
Credit cards are one of the most common forms of unsecured debt. Let’s learn why credit card debts are called unsecured debt.
Why Credit Card Debts Are Called Unsecured Debt
Credit cards are considered unsecured debt because they don’t require any collateral, like a house or car, to back up the loan. Instead, lenders rely on your creditworthiness—the promise you’ll repay the debt based on your financial history. Since there’s no asset tied to the loan, it carries more risk for the lender, which is why credit cards often come with higher interest rates and stricter terms.
If you fail to pay off your credit card debt, there can be serious consequences, even though the lender can’t immediately seize your property. If your debt goes unpaid for an extended period, your account could be sent to collections. This not only means more aggressive attempts to collect the debt but also negatively affects your credit report for up to seven years.
Your credit score will also suffer since payment history is a significant factor in determining your score. This makes it harder to get approved for loans in the future, and you may face higher interest rates if approved. Late fees will likely be added to your balance, making it even harder to pay off.
In more severe cases, your wages could be garnished, meaning a portion of your paycheck could be withheld to pay off the debt. Some lenders may even file a lawsuit to try to recover the money, and if the court rules in their favor, they may place a lien on your property. While state laws vary, certain personal assets may be protected, but the risk of losing property still exists.
Overall, staying on top of credit card payments is crucial to avoid these potential pitfalls. If you’re in deep credit card debt, don’t hesitate to contact Gershfeld Law Group. With our debt settlement program, you’ll be out of debt quickly! At Gershfeld Law Group, we have assisted thousands of Americans in achieving financial security by eliminating their debt quickly and efficiently for the lowest possible cost. Are you ready to be debt-free as well?
