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The difference between unsecured and secured debt

On Behalf of | Sep 26, 2018 | Bankruptcy

Texas residents who are looking to borrow money will take loans that are labeled as secured or unsecured. A secured loan is one that is backed by an asset such as a home or a car. If a borrower fails to make a payment on a secured loan, the lender has the right to take back the asset linked to the loan. For instance, if a person fails to make payments on a car loan, the lender can repossess the car.

As there is less risk for the lender, borrowers generally receive lower interest rates on secured loans. However, it may be necessary to insure the asset or meet other conditions to receive the funds. With an unsecured debt, the lender receives only a promise that it will see its money back. Credit cards are a common form of unsecured debt, and these types of loans tend to have higher interest rates.

Debtors are advised to prioritize secured debts over unsecured debts to minimize the risk of having an asset repossessed. However, those who can cover their monthly bills are encouraged to put extra money toward the unsecured debts. Doing so may mean paying less interest over the life of the loan. Ideally, borrowers will be able to manage their debt levels and only borrow what they can afford to repay.

Filing for bankruptcy may an option for those who are struggling to repay their debts. Most unsecured debts may be discharged in a bankruptcy proceeding. An attorney may be helpful in providing guidance to a debtor who is considering seeking protection from creditors.