When taking on debt, it’s a good idea to understand the difference between secured and unsecured debt. Here, we’ve broken down what each one means and what to consider.
What is an unsecured debt?
Anunsecured debt does not have any major assets – such as a property – linked to it. This means your house or a car, for example, cannot be taken by creditors to repay the debt, should you find yourself unable to pay it.
Instead, a creditor will take a look at yourcredit rating and report as a whole, to determine if they should lend any money to you.
The only way a creditor could use your assets to repay what you owe is by going to court and having aCounty Court Judgment (CCJ) issued against you. They could also request the court to make you bankrupt. However, these options are usually last resorts.
Types of unsecured debts
- Personal loans.
- Overdrafts.
- Utility bills.
- Credit cards.
- Payday loans.
What is a secured debt?
A secured debt is usually assigned to an asset you own – such as a property. This means should you fall behind on repayments and all other action has been taken by the creditor in an attempt to receive what they are owed; the property can be used to pay off the debt.
Types of secured debts
- Car finance.
- Mortgages – The deposit you put down is the portion of the property you own, the rest belongs to the mortgage lender until you pay off the mortgage.
- Logbook loans – You put forward your car against the loan.
- Pawnbroker loans – You will usually trade in a high-value item, such as an electrical item or jewellery, for a small loan. You get your belongings back when the loan is paid.
What are the features of unsecured debt?
Unsecured debts may offer less risk for you, as nothing you own is tied to them but they do have some restrictions. Here we’ve broken down the main elements to consider:
- Your assets – Such as your property or high-value personal items – are not at risk. Only if you fall behind on repayments and the lender applies for a CCJ or your bankruptcy is your personal property at risk.
- You can generally only borrow up to £25,000 with an unsecured loan – If you need a bigger loan, perhaps for home renovations, you would need to look at a secured option.
- Unsecured loans are easier and quicker to obtain,as the only vetting process is usually your credit report with no need to value your assets.
- You need a very good credit rating to get the best deal on unsecured debt – If your credit rating is low, it can be more difficult to get accepted by a lender.
- You have more flexibility with unsecured loans – They can be used to pay for a wider variety of needs. This is unlike secured loans – you must specify what they are being used for.
- Unsecured debt is generally more expensive interest wise – As lenders look to receive a bigger return on their investment because there is no asset for them to fall back on.
If you need more information on secured and unsecured debt,our team here at PayPlan can answer any questions you may have. We can also point you in the right direction when it comes to debt solutions if you are struggling to make repayments on either this or any other, type of debt. Call on 0800 316 1833to speak to one of our experts.
FAQs
Unsecured debt like credit cards or medical bills do not have any connection to property, and the creditors risk losing all their returns if the debtor becomes insolvent. Because of this, unsecured debt is very expensive, carrying often more than double the interest rates of secured debt.
How does unsecured debt work? ›
Unsecured debt is any debt that isn't backed by collateral. Since there isn't an asset that can be seized if you default, it's riskier for the lender. To compensate for this risk, lenders usually charge higher interest rates than those of secured debt.
Do you have to pay back unsecured debt? ›
Just because an unsecured loan is not secured does not mean there are no consequences if you fail to repay the debt or fail to make your payments on time. Most creditors charge hefty late fees each month that your payment is not received on time.
How long before unsecured debt is written off? ›
For most debts, the time limit is 6 years since you last wrote to them or made a payment. The time limit is longer for mortgage debts.
Can I lose my house over unsecured debt? ›
If you fail to pay unsecured debt, the creditor can't take any of your property without first suing you and getting a court judgment, subject to a few exceptions. A "secured debt," on the other hand, has a piece of property serving as collateral for the debt.
How do I get out of unsecured debt? ›
Filing for Chapter 7 bankruptcy wipes out unsecured debt such as credit cards, while Chapter 13 bankruptcy lets you restructure debts into a payment plan over 3 to 5 years and may be best if you have assets you want to retain.
What are the disadvantages of unsecured debt? ›
You won't get many second chances to pay, if at all, if you miss a repayment. Additional costs – An unsecured loan is secured by trust; it is a much bigger risk for the lender. This means that there will be higher costs associated with this type of borrowing.
How much unsecured debt is too much? ›
Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
Does unsecured debt hurt credit score? ›
Missing payments and defaulting on an unsecured loan won't cost you any collateral, but it tends to have a major impact on your credit. Because your payment history is the biggest factor in your credit score, missing even one loan payment can significantly affect your credit score.
How do you discharge unsecured debt? ›
Both secured and unsecured debt can be discharged in Chapter 13 bankruptcies, but non-dischargeable unsecured debts cannot be discharged in California.
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
What happens if unsecured debt is not paid? ›
Bottom line. If unexpected circ*mstances arise and you can't repay an unsecured loan, it's important to be proactive. If you fail to take action and continue to miss loan payments, the ramifications include the loan being called due, assets being seized and your credit score taking a nosedive.
What happens when someone dies with unsecured debt? ›
When someone dies, their debts are generally paid out of the money or property left in the estate. If the estate can't pay it and there's no one who shared responsibility for the debt, it may go unpaid. Generally, when a person dies, their money and property will go towards repaying their debt.
Does unsecured debt expire? ›
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.
Do unsecured loans have to be paid back? ›
If your personal loan is unsecured, which is often the case, the lender doesn't have any collateral to seize if you fail to repay. As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order.
How are unsecured creditors paid? ›
Unsecured creditors are one of the last groups to be paid, being placed above the shareholders of the company. It is often the case that this group receives little money, if any, from the distribution of assets once all other creditor groups have been paid.
How does an unsecured loan work? ›
Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of property or other assets as collateral. The terms of these loans, including approval and receipt, are most often contingent on a borrower's credit score.
