Area of Law: Credit, Debt and Bankruptcy
Answer # 248
Secured vs unsecured debtRegion: Ontario Answer # 248
Debt will fall into one of two categories: secured or unsecured.
Secured debt refers to debt that has some sort of collateral, meaning property or other asset (such as a house or a car) attached to the debt that a borrower offers as a way for a lender to secure the loan. It is security in case debt is not paid back. If the borrower cannot repay the loan, or misses payments, the lender may seize and sell the collateral.
Because secured loans require collateral, it is often the easier type of credit to obtain because it comes with less risk for the lender. Your income, employment and credit history is considered, but ‘creditworthiness’ and credit score are not as highly scrutinized. Generally, this also means that interest rates are lower than interest rates for an unsecured loan.
The most common types of secured debt are mortgages and car loans.
If a borrower defaults on a mortgage loan, the bank (or other lender) can seize the property and sell it to regain the money owed. In order to maintain the value of the property and protect the lender, homebuyers are usually required to purchase a homeowner’s insurance policy when getting a mortgage. If your lender does seize your home to recover the money you owe, this is known as foreclosure. If the lender sells the home for less than what is owed, you will still be responsible to repay the outstanding amount.
Similarly, if financing (meaning a loan) is needed to buy a car, the bank will normally require the borrower to have certain insurance coverage. This ensures that if something happens to the car, or the payments cannot be made, the bank will still get back most of the outstanding loan balance.
Unsecured debt refers to credit given to a borrower with no collateral. Because there is no collateral, a lender will consider an individuals’ credit score and repayment history more closely when deciding whether to approve the loan.
A high credit score and good credit history will make it more likely you will be approved for an unsecured loan. But if your credit score is low, and you have history that shows you are not good with dealing with money, your loan application will probably be rejected. Common types of unsecured debt are debt from credit cards, payday loans, personal loans, student loans and unpaid bills.
Because you have no collateral, while you will not have anything taken from you if you do not repay the loan, there are other negative consequences:
- interest rates are usually higher than for secured debts,
- there are fees for late payments,
- your account could possible go to collections and you will be pursued by debt collectors,
- the creditor might have your wages garnished, and
- your credit score and credit history could be affected.
A bankruptcy will eliminate most, but not all unsecured debts. Student loans, support payments, and court penalties and fines will not be eliminated.
A criminal record will affect your ability to get a loan, a mortgage, or a job. To erase your criminal record, call toll-free 1-877-219-1644 or learn more at Federal Pardon Waiver Services. It’s easier than you think.
There are many options to consider when you are in a situation of financial difficulty. For easy-to-understand debt solutions on your terms, contact our preferred experts 4Pillars and rebuild your financial future. With 60 locations across Canada, they will help you design a debt repayment plan and guide you with compassionate advice. No judgment. For help, visit 4Pillars or call toll-free 1-844-888-0442 .
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