Many Michigan residents carry some level of debt. Debt can be a dangerous thing, and having a comprehensive understanding of it can be crucial to your financial well-being.
Many potential sources of debt exist, from mortgages and car loans to credit card debt and other loans and obligations. The landscape can be confusing, but it’s useful to understand all debt as either secured or unsecured.
The difference between secured and unsecured debt
A secured debt is a debt in which some collateral is part of the loan. Common examples include mortgages and auto loans.
If a borrower stops paying a mortgage or a vehicle loan, the lender may have the ability to take possession of the property or vehicle. This is the way in which a loan can be understood as “secured”.
Unsecured debt is a loan that is not secured by collateral. Note, though, that lenders do have the option of suing should the borrower default, potentially leading to a financial judgment.
How do lenders treat secured and unsecured debt?
Since secured debts are guaranteed by an asset, interest rates tend to be lower. That’s because a lender has the ability to confiscate an asset should the borrower fail to make payments.
In contrast, unsecured debt is much harder for the lender to recover should the borrower be unable to continue to make their payments. So, borrowers tend to protect themselves by demanding higher interest rates.
But keep in mind that lenders still have legal recourse if their unsecured debts aren’t met. Lenders have the ability to file suit for their unpaid debts, and your wages might be garnished to repay those debts. And lenders can send unpaid debts to collection agencies, who will persist in aggressively contacting you to settle the balance.