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Secured Debt Versus Unsecured Debt

From Santa Fe Institute Events Wiki

Believe it or not, most people do not understand the core principles surrounding debt. An overwhelming majority of people cannot comprehend basic financial knowledge such as unsecured debt and secured debt. It is extremely important that you understand the difference between the two. Here is a basic overview of unsecured debt and secured debt. Unsecured debt is debt that is not backed by collateral. Credit cards are the most common form of credit card debt. Because there is no collateral to back unsecured debt it is extremely easy to overextend your credit and bury yourself into debt. If you find yourself buried in credit card debt, you should try to minimize your payments. You can do this by joining a debt consolidation program. A debt consolidation program will consolidate credit card debt into one simple payment. This way you do not have to pay multiple creditors. This is just your first step to get out of credit card debt. You then need to make payments each month and cut spending. This is unsecured debt. Secured debt is a loan that is backed by collateral. Common examples include car loans and mortgages. Secured loans are safer for creditors because the lender can just take the collateral if you miss a payment. They do not need to worry about writing anything off because they now possess something equal to the loan’s value. This is the main difference between secured debt and unsecured debt. Most people get themselves into trouble with unsecured debt because you do not have to make monthly payments on unsecured debt. With secured debt you pay the same amount each month. With unsecured debt you can make a minimum payment of only $15.00 and let the interest accrue. This is why you need to be vigilant and understand what you are getting yourself into before you get a loan. You do not want to end up with massive piles of debt.