Unsecured debt is debt that doesn't have collateral attached to it. That is, the creditor doesn't have anything to take from you should you fail to make payments. Credit cards are an example of unsecured debt. Secured debt has collateral attached to it. Creditors can seize assets if you don't pay the debts. Home loans are examples of secured debt.
Advantages of Unsecured Credit
Unsecured credit is beneficial for young people just starting to build their credit histories. For example, when they get credit cards, they can buy books for school, clothes and other necessary items without worrying if they have enough money. In addition, they learn financial discipline as they pay the monthly bills.
Disadvantages of Unsecured Credit
The problem with unsecured credit is that if you don't pay your debts, not only will it remain on your credit report for seven years, but you will have difficulty receiving credit for long-term goals such as a new house or a building for a new business. To avoid this, you should have only one or two credit cards so it will be easier to make the payments.
Advantages of Secured Credit
Secured credit allows you to make bigger purchases such as a new car or home. With secured debt you don't have to worry about having to pay so much money out of your own pocket, and this can relieve stress. In addition, if you continue to make timely payments on secured loans, your credit rating increases.
Disadvantages of Secured Debt
Secured debt becomes a source of stress when you make late payments or stop paying altogether. The creditors usually call frequently and send letters, but they also can seize your house or car because you put them up as collateral.
Considerations
Consider the pros and cons of secured and unsecured debt before signing up for credit. Take into account your income, financial maturity and financial literacy when choosing secured or unsecured debt.
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