When it comes to debt relief, unsecured debt is more commonly settled and consolidated than secured debt. Unsecured debt is not tied to assets or collateral, and often consists of personal loans, credit card debt, or medical bills. While not making payments can negatively impact the client's credit score, lenders cannot claim property or assets when people don't make payments for unsecured debt.
Debt consolidation and debt settlement programs typically only work with unsecured debt. Lenders look at the following when determining borrow worthiness: character, capacity, capital, collateral, and conditions.
The following types of unsecured debt are frequently seen:
Credit Card Debt
This is the most common type of unsecured debt. Balances carry over and people can continue to borrow every month. People should be careful with this kind of debt because high interest rates can really add up when borrowers don't make their payments. In 2015, Americans collectively carried around $925 billion dollars on their credit cards.
In most all cases, people do not choose to incur medical debt or bills. Medical debt often comes unexpectedly, and can add up fast. Studies show that around 29 percent of adults in the U.S. have medical debt and struggle to pay their bills.
People use personal loans for a variety of reasons, whether it is to start up a business, go on vacation, help pay off debts, etc. The interest rate and approval of personal loans often largely depends on credit score. Personal loans usually have lower rates than credit cards, and require identification like a driver's license, or a social security card.
Secured debt is not as commonly accepted into debt consolidation and debt settlement programs because it requires collateral. Secured debt is usually for the big-ticket items, like house mortgages and car loans, and requires people to give up assets if they don't pay the debt.
Mortgage loans are secured by the house and auto loans are secured by the car. This kind of debt is considered less risky for lenders since they can typically take back the asset when people do not make payments. Additionally, lenders maintain specifications to keep the asset's value.
People can consolidate secured debt. In this case, people would use the asset of the loan as security. While consolidation is an option for secured debt relief, consumers will still lose their asset if they do not make payments. Home equity loans and cash out refinancing are both types of debt consolidation loans. People having trouble making their payments can also call their creditors and see if they are will to create a new repayment plan. While it may be slightly easier to find debt relief for unsecured debt, there are options available to help people struggling with secured debt.