Secured Debts vs Unsecured Debts – What Is The Difference? No ratings yet.

It won’t be wrong to define credit score as fluid. Even a minute change in the credit report can affect your credit score, this change can be either up or down. A FICO score keeps a check on your payment history, knows the length of your credit history and the amount of debts you have, and whether you have applied for fresh credit. You should be aware of that both the secured and unsecured debts get reflected on your credit report and it influences your credit score as well.

secured debt versus unsecured debt

Before we proceed with the dissimilarities, let us get to know about both secured and unsecured debts –

What Are Secured Debts?

– Also known as liens, this type of debt is protected mainly by a collateral in order to cut down the risk that is involved with the lending like a mortgage. If, as a borrower, you have failed to make a repayment, the bank is authorized to seize your house and they can even sell your house. Just like unsecured debts, the secured debts are also informed to the three credit bureaus.

Secured debt is further divided into voluntary lien and involuntary lien. Let us get in the details of secured debt –

Voluntary lien – It is also termed as a voluntary lien. This takes place when you give your consent of paying money, to the creditor, in exchange for some benefit. The debt is also attached by a collateral, it can also be said that a collateral has secured the debt.

Involuntary lien  – It is, basically, a claim that is being made against the property and there is no involvement of agreement. Even the state enjoys the right to impose this lien. It mainly comprises of –

  • Judgment liens.
  • Real property taxes.
  • Mechanic’s liens.
  • Liens for delinquent income taxes.
  • In some states. landlord liens.

Why secured loans are offered by the banks –

It can prove beneficial for most people as it offers them with an opportunity to have a home loan and along with that it also offers security for the bank. One of the other examples of secured debt is a car loan. When you purchase a car, you will have to sign an agreement that says if you didn’t make the payments (due to any reason) on your car loan, the lender has the authority to take the possession of your car.

How to judge a secured debt ?

There will be times when you won’t be able to make out whether the debt is secured or unsecured. The main reason is that the security agreements are, most of the times, mentioned in small fonts and most of the times people tend to overlook them while buying an item.

The best way to make out between a secured and unsecured debt is by closely reading the contract documents.

ALSO READ – Secured Credit Cards     |     Unsecured Credit Cards

What Are Unsecured Debts?

– There is no requirement for any collateral for these debts. As there is no collateral, it is much riskier for the creditor and this is the reason, as a protective measure, high-interest rate is attached to the loan. Some of the key examples of unsecured debts are – legal bills, personal bank loans, gas cards, medical debts, tax debt, and credit card debts. But prior to exercising this right, the creditor has to file a lawsuit in the court. There he has to prove that the contract is still valid and you have failed to meet the clauses or the points and have a judgment. This means –

  • The loan payment remains the same each month.
  • The time period will be fixed, that is required, to repay the loan.
  • The interest rate also stays the same and cannot be altered during the tenure of the loan.

Well, almost every loan is unsecured in nature, only auto and home loan are two exceptions which are secured.

When unsecured debt is not paid –

If you are not able to make the payment, due to any reason, the creditor will call you to get the payment, he can file a lawsuit, and he can even report to the reporting agency. If he is a nongovernmental unsecured creditor, he is not authorized to seize your assets and for that, he will need a court judgment.

Getting a Court Judgment by the unsecured creditors –

In order to have a judgment, it is important for the creditor that he has filed a complaint in the federal court. The copy of that complaint will also be shared with you. It’s not that the creditor has all the rights, you also have the right to file an answer and contest the lawsuit before the judgment arrives.

Types Of Unsecured Debts

  • Credit cards – Credit card debt is one of the common types of unsecured debts. It has a revolving line of credit nature where you can continue borrowing each month, thus carrying balances over. The best way is to make a payment is to pay more than the minimum each month. If you don’t make timely payments, the interest rate, that is 15.7% on average, can rise considerably to 27% or even higher. The other advantage of paying more than the minimum is that you get to take yourself out of the debt much faster.

Also Read – Credit Card Debt Relief Programs    |     Credit Card Hardship Program

  • Personal Loans – Such loans can be used for multiple reasons such as paying for the home repairs or starting up a business. These loans come with a cap and usually, the bank is behind the funding. Original lending terms will entirely depend on your credit history, so your credit history also bear great significance. When you have a good credit score, the interest rate will also be lower and above all, you get to save a significant amount of money.
  • Business Loans – It has been observed that unsecured lines of credit are being used for cash on demand by the majority of the businesses. Let us assume that an unexpected expense comes out from nowhere, especially the one that affects your business heavily, then this is where the bank credit line can prove handy.

Credit lines can be defined as pools of cash that the business owners can use anytime during the dire straits. Make sure you have the holistic knowledge of the credit line and you should also know how quickly you can have the cash access and what are the interest rates as well.

  • Apartment Leases – Well, rent is not deemed as debt, but when you are not able to pay it, you get indebted to your landlord. If such a scenario arises, your landlord can seek a legal action against you to evict you. However, the good part is that you don’t have any of your belongings at risk of being seized but your debt will be considered as unsecured.

Pros & Cons of unsecured debts –

Pros –

  • You don’t have to worry about getting your assets seized.
  • You get to enjoy shorter repayment term.

Cons –

  • The interest rate is on a higher side.
  • It is quite complicated to get it from a lender.
  • You don’t get to enjoy any tax benefits.
  • You will be allotted lower borrowing amount.

ALSO READ – Credit Card Debt Consolidation   |   Credit Card Debt Consolidation For Bad Credit

Differences between secured debts and unsecured debts –

Let us get to the important part i.e. difference between the secured debts and unsecured debts, here it is –

Secured Debt –

  • There is involvement of collateral as security in secured debt, such as home mortgage loan or a car loan.
  • If you have become delinquent on the secured loan, your assets will be seized.
  • When it comes to secured debt, you can borrow more money and have better interest rates as well because the lender knows that he has the collateral in case you become delinquent.
  • It is imperative that you have paid your secured debt first. The main reason behind this is that you have your assets at risk if you don’t.

Unsecured Debt –

  • In unsecured debt, there no collateral involved, such as credit cards.
  • If you are not able to make the payments, the lender cannot seize your property or any other asset. However, the lender can make you repay using legal methods like suing you.
  • Lenders charge more interest rates or they can also restrict you amount you can borrow.

So, there you go if you have any doubt regarding secured and unsecured debts, then you can refer the above-discussed information.

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Zombie Debt: Don’t Get Haunted, Chase Away The Collectors No ratings yet.

In the past, if you had debt and you were not able to pay it, there may be a possibility that those debts have been declared as ‘uncollectable’. In other words, it can be said that the company has stopped showing interest in collecting the debt and there can be two reasons responsible for it : the company didn’t show any interest in collecting it and secondly they had stopped bothering to get in touch with you.

However, of late, a new variety of debt collector has surfaced to purchase these old debts and they are leaving no stone unturned to collect them once again. The worst part is that you start receiving letters and phone calls asking you to make the payment for your debts. So, at this moment you should have all the information about the zombie debt and what you ought to do in order to deal with the collectors.

Related Post:  Credit Card Debt Management

What is ‘Zombie Debt’ ?

– In the situation where you are not able to pay the debt or you are not paying the debt deliberately the lender, on the other hand, can make you pay the debt using varied methods. These collectors can send you harassing letters, you can receive threatening phone calls or in the worst case even wage garnishment. There have instances in the past where the debtor has moved away or simply have no funds to pay the debt.

After a while, it can be a costly affair for the collector to continue making attempts for debt collection. The majority of the lenders don’t try collecting the debt after six years as it has already crossed the set limitations and you, as per the laws, you don’t have to pay the debt. However, even after so many years, these old debts enjoy some worth and if the old surety has stopped making efforts to get it paid, other companies take their place. These un-collectable debts are then sold, at a smaller amount, to other companies dealing in debt collection.

What is Zombie Debt? How To Get Rid Of Collectors [INFOGRAPHICS]

Even these zombie companies make a meager payment in order to have these debts, getting paid on even a small amount of the loans can prove profitable for such companies. As per an estimate, such companies pay around 3% of the face value of the loan. Let us say, in the case where the original debt is $1,000, the new creditor will make a payment of around $30. If the company can make even one person to repay $1,000 debt in full, it will end up covering the costs to over 30 identical loans.

Well most of the times, the debt is quite old and debtor have forgotten about it, and it may no longer be highlighted on your credit report. Or perhaps, the debtor has officially announced bankruptcy but didn’t remember to incorporate that debt in the bankruptcy plea. There is a fixed time period on how long a lender can try for the collection of the debt. While the debt remains valid after the set time period has passed, as per the law you are no longer required to make the payment for that debt.

Related Post:  Credit Card Debt Settlement Process

Time-Barred Debt Accounts for Debt Collection Activities

The most comprehensive data available about the age of debts being collected by debt buyers  comes from a  2013 FTC study of the debt-buying practices of some of the nation’s largest debt  buyers.

This study found that nearly 25 percent of debt acquired from the original creditor  and more than 60 percent of debt purchased from other debt buyers was over three years old at  the time of purchase.

More than 30 percent of the debt purchased from other debt buyers was  over six years old.

Chased By A Zombie Debt – Tips To Get Rid Of Debt Scavengers

 kill zombie debt infographic

In order to save yourself from paying a zombie debt, you need to be familiar with the below-discussed steps –

  • The debt collection company can be sent a certified letter asking them about the owning of the debt and asking them to prove it that you actually owe it.
  • In case you receive a letter, you should keep it with you.
  • You should not be talking for too long on the telephone. If in case you do get a call, you can ask them the address of the debt collection company and send them a letter.
  • Make sure that you avoid having a discussion with the collector till the time you have received a judgment against you. The Fair Debt Collection Practices Act states that the debt collection company should provide you all the details.
  • Make sure that you don’t accept that the debt is yours. There are strong odds that they can use this information against you.

When you have the details regarding the debt, you can decide on whether the time period, for paying the debt, has been crossed or whether it is your debt in real terms. At times, it can be because of some computer error, identity theft or some fraudulent method just to accumulate money from you.

Related Post:  Credit Card Debt Negotiation – An Expert Guide

When the last time an activity is being registered on the debt is actually the last date when the statute of limitations for the debt actually begins. Generally, it is the last payment that you need to make. Under the guidelines of FDCPA you, as a debtor, cannot be sued for the collection of debt if it is more than six years. There is a set limit i.e. 7 years and when it is passed, the credit card debt should be removed from the credit reports.

Another letter should be sent to the debt collection company if they keep on contacting repeatedly. Since, majority of the zombie debts are beyond the limitations of set time period, the debt collection company might not be able to go ahead with the legal action.

Old Debt, Statute of Limitations on Debt

Letter to Collection Agency to Stop a Zombie Debt which is outside of the statute of limitations

This sample letter describes the collection agency to stop because the debt is outside of the statute of limitations, plea a cease and desist under the FDCPA – Download pdf

About paying the debt –

Once the set time limit, for paying the debt, has been crossed there is no way you are going to be benefited by paying the debt. The majority of the debt collection companies/agencies inspire the debtors to pay their debts through guilt, inculcating fear, lack of knowledge. But, it in the case where the debt has crossed the statute of limitations, which can differ significantly by debt’s nature and state, you don’t have to pay anything.

At times, these agencies may guide that you can pay less debt as compared to what you actually owe . But on the other hand, this can have a negative impact. Unless they have offered a written offer-in-compromise, paying any amount will still make you liable for the debt. This also means that any amount that you pay will end up restarting the statute of limitations.

If you really think that you should pay off the debt then you have every right to go ahead and do so, at the same time you have to be certain as who is actually benefiting. The money is not going to get transferred to the original lender instead it will go to the debt collection company/agency.

Fair Debt Collections Practices Act –

There is Fair Debt Collections Practices Act (FDCPA) that offer protection from getting harassed when these agencies collect the debt. The act also lays strict rules against the debt collection practices. In addition to others, setting a statute of limitations while the collection of the old debts is one of the most important ones.

  • There is a provision in the law where the debt collectors are being refrained from passing on any lie regarding the debt or what can happen in the case when you don’t pay your debt.
  • The debt collectors are also being prohibited from sharing any information about the debt that is incorrect.
  • If the debt has been inactive for a minimum time period of six years, you cannot be sued for your debts. And the debt should also be removed from your credit report.

Sump Up

Make sure that you have verified the debt, this will surely save you from harassment. If the debt is too old, it is not mandatory to make the payment for the debt. Gain holistic information about statute of limitations in your area and see whether the debt is showing up on your credit report.

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