Money owed is money owed, right? Not exactly. Debts can differ dramatically, especially when it comes to which debts can be consolidated and the ways lenders can work to recover what was borrowed. There are two major types of debts: secured debt and unsecured debt. If you understand the difference, you can better understand your financial health as you work your way out of debt and get on the path to a stronger fiscal future. Let’s take an in-depth look at the different kinds of debt so you can make informed decisions as you work to prioritize your repayment process.
In-Depth Look: Secured Debts
If you have a mortgage or an auto loan, you have what is known as secured debt. This is a debt that is connected to an asset that you have, and lenders consider the asset collateral. This is their insurance policy that you will repay the debt. As part of the repayment process, lenders place what is known as a lien on the asset, which gives them the legal right to take it from you — foreclosure on a house, for example — if you fall behind on payments. Until you’ve paid the entire debt in full, you do not really “own” the property.
The trickiest part of secured debt is that even if you fall behind on payments and the lender takes the asset back, you could still owe them more money. That’s because the lender sells the asset — your car, for example — at auction to the highest bidder. If the selling price doesn’t cover what you owe, you are still legally responsible to pay the balance.
In-Depth Look: Unsecured Debts
Meanwhile, an unsecured debt is not tied to anything you own. That means that even if you fall behind on your payments, it would take a lengthy, complex legal proceeding for the lender to take any assets like your car, your home or anything else of value from you. Examples of unsecured debt include credit card debt, medical bills, student loans and many payday loans.
Of course, there are many ways that lenders can try to recover the money owed to them, even without the power of a property lien. Often, they will employ collection companies to harass borrowers who are unable to pay. They may also file lawsuits, and if they win, they may garnish your wages, put a lien on your assets and report the debt to credit bureaus.
What Debt Qualifies for Consolidation?
For those who are overwhelmed with debt, a common and responsible way to address the stress and repayment process is through what is known as debt consolidation. Debt consolidation is when a borrower works with a financial professional to apply for a loan that can be used to pay off high-interest debt from a variety of sources. That way, you would pay just one payment while addressing a variety of debts and also helping your credit improve.
Both secured and unsecured debt — including credit card debt, medical bills and student loans – can be consolidated. Balance transfers on credit cards, personal loans, home equity loans and other debt consolidation loans can also be consolidated. Want to learn more about the process of debt consolidation? Log on to Refi.com today.