What Is The Difference Between Secured And Unsecured Debts?

One of the first steps that many pieces of debt advice will suggest is to write down all of your debts, the amount owed, how much you need to repay each month and what they are secured against.

The concept of debt security is one that is often obfuscated and misunderstood, but it is a very important aspect of debt to understand, particularly if you are in a financial situation where a debt relief order or declaring bankruptcy (1) is an option that must be seriously considered.

Security in the context of debt (as opposed to on the stock market) is an asset that is pledged by a borrower that is given up if the borrower defaults on the debt or does not pay it.

The most common example of this is seen with mortgage loans, where the security is the house you just bought. If you do not keep up with the repayments, declare bankruptcy or simply default on the payment, the lender takes the house and will typically sell it to make their money back.

Thnt of a default, as well as equity release plans (2) such as lifetime mortgages where a loan is taken out using your home as collateral, so you don’t have to repay anything until you are in long-term care and sell the house or until you die.

ere are other types of secured debt, such as any item bought on finance, which will be repossessed in the eveUnsecured debts do not have an asset attached to them and typically as a result come with higher interest rates. These are debts such as credit cards and smaller unsecured loan types.

While you do not lose a specific valuable asset if you default, there is still risk involved, as defaulting can have a serious effect on your credit score, lenders may seek other means of repayment and can, if the debt is high enough, petition for bankruptcy.

If you are struggling with debt at the moment because of cost of living challenges, get in touch with us today to see how we can help.

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