If you've ever bought a car, you know it's a major purchase and that you must pay back your loan every month to keep your vehicle. With a credit card, you are taking out a loan every time you use your credit card; the creditor pays for the purchase and expects you to pay it back. Defaulting on credit cards can seriously harm your credit even though the creditor cannot take your property if you do not pay.
Type of Debt
Car loans are secured debts. With a secured debt, the debt is backed by property; the lender can reclaim his property if the debtor fails to pay the debt back as agreed. In the case of a car loan, the creditor can repossess the vehicle if the debtor defaults. Credit cards are unsecured debts, so the creditor cannot take property if the debtor defaults. Creditors often use the court system to collect unpaid unsecured debts.
Nature of Debt
When you purchase a car, you pay a set amount each month until the debt is completely paid off. Your beginning balance is the cost of the vehicle minus any down payment you make at the time of purchase. In contrast, with an unsecured debt your balance begins at zero. As you make purchases using your credit card, your balance rises. You can then pay the entire balance at once or pay it off over time.
Bankruptcy
In most cases, unsecured debts like credit card debt are treated differently than secured debts when you file for bankruptcy. According to the Federal Bankruptcy Court, If you are filing for Chapter 7 bankruptcy, you can choose to give back your car or to reaffirm the debt, meaning that you make new arrangements to pay it back after the bankruptcy is approved. Credit card debts are usually discharged altogether via bankruptcy. When filing for Chapter 13 bankruptcy, you may have a maximum of $360,475 of unsecured debt and $1,081,400 of secured debt, as of 2011.
Equity
As you pay off a secured debt such as a car loan, you build equity in the property, according to GMAC Smart Edge. Equity is the difference between the car's total value and the amount you still owe on it. Building equity helps strengthen your credit and gives you the power the make larger purchases, such as a bigger car or a house. You do not build equity when you pay off unsecured debts such as credit cards.
0 comments:
Post a Comment