Secured vs. Unsecured Debt: Understanding the Differences
Do you have a significant amount of personal debt? If so, being well informed is a crucial part of managing your finances and getting the help you need.
Here’s what you should know about secured vs. unsecured debt and the options available to you if you’re experiencing insolvency.
What is Secured Debt?
A secured debt is a debt backed by an asset. This means that you’ve offered something you own as collateral for the debt. This collateral will act as compensation for the lender should you fail to pay them back.
The most common type of secured debt is a mortgage. If you don’t make your interest payments on time, the bank can seize your property and sell it to recover the money they’re owed. Because it’s backed by collateral, interest rates on secured debt are typically low.
Dealing with secured debt when you can’t make payments
Unfortunately, you don’t have a lot of options if you’re having trouble making your payments on time. Declaring bankruptcy won’t let you keep the asset and clear the debt, as the bank has the right to seize whatever you put up as collateral. One option is to seek out a debt counsellor. These professionals can help you manage your finances, so it’s a good idea to make an appointment if you think you need help.
What is Unsecured Debt?
The vast majority of consumer debt is unsecured. Credit cards, lines of credit, consolidation loans and bills all fall in this category.
The main difference between unsecured and secured debt is that when you buy something with your credit card, the bank doesn’t have the right to seize it should you fail to pay them back on time. However, banks can obtain a court order to recover the money they’re owed through income garnishment.
Unsecured debt typically comes with much higher interest rates to balance out the risk of default.
How to face unsecured debt when you can’t make payments
There are a number of different options when it comes to unsecured debt. In some cases, it may be possible to pay off the amount owed by taking out a second mortgage. Read our blog about the Pros and Cons of taking out a second mortgage. In other cases, a consumer proposal — which is an agreement to pay back part of the debt and forgive the balance — could be the answer.
No matter what your circumstances are, if make your loan payments, it’s a good idea to seek the help of a licensed insolvency trustee. In addition to being federally licensed debt counsellors, they’re the only ones who can submit consumer proposals.
Personal Debt Help in Eastern Ontario
At D. & A. MacLeod Company you can count on our Licensed Insolvency Trustees to help you overcome your financial difficulties. If you’re in the Ottawa or surrounding areas and need help managing debt, call us today for a free consultation!