Consumers frequently borrow money to purchase expensive property such as homes, land and cars, which represents a large risk to lenders. Lenders often require that borrowers agree to secured loans for major purchases. A secured loan uses the value of the property purchased as collateral for the debt and gives the lender the right to take possession of the property if the borrower does not pay the debt.
Pay Secured Loans First
Secured loans give lenders the right to foreclose on your property if you fail to make payments. Since borrowers typically use secured loans to purchase housing (home mortgages are a common type of secured loan) and transportation, it can be beneficial to pay your secured loans before other debts and bills to ensure that you keep ownership of your most valuable possessions. If money is short it is better to skimp on discretionary spending and other less essential expenses.
Consider Walking Away from Upside-Down Mortgage
Home mortgages are the most important type of secured loan for the average family. The payments you make on your mortgage can allow you to build ownership or equity in your home, but if the value of your home has fallen over time, the balance of your mortgage might be higher than the value of the home. This is situation known as being "upside-down" or "underwater" on your mortgage. If your mortgage is significantly larger than the value of your home, you might save money in the long run by walking away from your loan. For example, if you have a $400,000 mortgage and your home is only worth $200,000, you would be paying twice what the home is worth. Walking away from a mortgage will force the lender to foreclose and allow you to stop making costly payments.
Consider the Cost of Walking Away from a Mortgage
Walking away from a mortgage can have a severe negative impact on your credit score. Lenders use your credit score to determine whether to approve you for loans and how much interest to charge. According to CNN, walking away from a mortgage can damage your credit to the point where it might take seven years or longer before you are able to rebuild your credit score to the point where you will be able to get another mortgage.
Bankruptcy Can Stop Foreclosure
If you have missed payments on a mortgage and your lender is attempting to foreclose on your property, filing for bankruptcy can prevent foreclosure. Chapter 13 bankruptcy allows an individual debtor with a regular income to reorganize debts and pay them back according to a court-approved plan, while halting foreclosure.
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