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How secured and unsecured debt differ

On Behalf of | Jul 30, 2020 | credit card debt |

People struggling to stay on top of their debt may have a mix of different types of bills to pay. These may include medical bills, credit card debt, automobile loans and more.

Not every type of debt is the same and consumers should learn about the two primary forms of debt, secured and unsecured, and how they differ.

Secured debt

As explained by The Motley Fool, a secured debt is connected to an actual asset that the lender may be able to put a lien on or repossess should the consumer fail to make the payments as promised in the credit agreement. Examples of secured debts include mortgages and vehicle loans.

Secured credit cards or secured personal loans require a consumer to essentially front the money against which they will borrow. These accounts may offer people rebounding from bankruptcy a first step to rebuilding good credit.

Unsecured debt

With unsecured debt, no collateral exists. Creditors assume a higher level of risk here which contributes to the higher interest rates on unsecured credit accounts versus secured credit accounts. Credit card debt is a common form of unsecured debt that may plague many consumers.

Repaying credit card debts

U.S. News and World Report indicates consumers needing to pay down credit card debt may employ one of two strategies. In the snowball approach, consumers pay off the account with the smallest balance first while paying minimum amounts on other accounts. After one account is paid off, the account with the next lowest balance is repaid and so forth.

In the avalanche approach, consumers target a phased repayment approach based on interest rates, starting with the account that has the highest level of interest.

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