If you think that all debt is the same, think again. The two main categories of debt – secured and unsecured – can impact you in different ways.
Secured debt is tied to a specific asset that is used as collateral for the debt. If you fall behind on payments for this type of debt, the lender has the right to take away the collateral asset. Common examples of a secured debt include home mortgages, auto loans, or large store charges with a security agreement. These are items that you will not fully own until the secured debt is paid off. If a lender seizes your property or security asset because you have become delinquent on payment, the asset will be sold to cover the costs. However, if the selling price doesn’t wholly cover the debt, the lender may still come after you for the difference.
Unsecured debt is the opposite of a secured debt in that it is not tied to any property or assets. If an unsecured debt is defaulted on, the creditor has no legal right to take anything belonging to you without first obtaining a money judgment against you in court. Examples of an unsecured debt include credit cards, medical bills, student loans, legal fees, and health club memberships. Though this type of debt is not tied to assets, it is often harder to obtain and can carry higher interest loans to justify the security risk.
Be wary, however, of repayment plans that turn unsecured debt into secured debt. One example would be if you have a lot of unsecured credit debt and decide to take out a home equity loan to cover the costs. The immediate gratification (and potential tax deduction) may seem appealing at first, but it turns your property into a debt anchor you are then at risk of losing if the new loan is not paid back. Another thing to be aware of is the security agreements seemingly unsecured credit card debt that list secured debt as one of the terms and conditions.
While it is important to pay off both types of debt, there are different ways and reasons to prioritize each category. For instance, if you only have the ability to pay off some bills, give priority to your secured debts as they are often harder to catch up on and are also attached to asset or property loss if payment is not received. If you are making extra payments to pay off some of your debt, you might want to give more attention to the unsecured debts on your plate as they can carry higher interest and penalty rates, making it that much more expensive and taking that much longer to pay it off. No matter which direction you choose or which type of debt you owe, the best thing to always do is keep up with the minimum and installment payments on all of your accounts.