Tuesday, March 20, 2012

The Responsibility of Unsecured Debt

Unsecured debt might seem like free money to some, but this line of thinking couldn't be further from the truth. In fact, unsecured debt might take even more discipline and responsibility to manage than secured debt. While you know what you stand to lose with secured debt, getting into trouble with unsecured debt can sometimes be an even bigger headache.

Unsecured Debt

    Simply put, unsecured debt is debt that doesn't have any collateral attached. While the most common types of secured debt are mortgages and car loans, the most frequently seen type of unsecured debt is credit cards. Because there are no immediately evident strings attached to unsecured debt, it can become tempting to use in an irresponsible manner.

Use of Unsecured Debt

    By and large, secured debt is used for material things that are necessary, such as cars and houses. Unsecured loans, on the other hand, are not tied to a tangible asset, nor are they particularly necessary. While you may need to use unsecured debt in the form of a student loan to pay your way through college, other types of unsecured debt are not as critical to your future. These types of unsecured debt include personal loans and credit cars. However, it's important to note that you will have a hard time obtaining secured debt until you build a solid credit history by using unsecured debt, so responsibility with unsecured debt is critical.

Unsecured Debt Penalties

    Defaulting on a mortgage or car loan yields an obvious result---you lose the asset that you're paying off. However, with unsecured debt, the lender cannot take anything from you because you've failed to make good on your payments. Instead, the damage will come through late fees, negative marks on your credit report and potentially higher interest rates. These are items you may be prepared to deal with if you're having financial difficulty, but you shouldn't act as though there are no consequences for missing payments on your unsecured debt.

Paying Unsecured Debt

    When you take out a car loan or a mortgage, you have a specific schedule of payments that takes into account your interest rate, the amount borrowed and the term of your loan. This can help you stay on track and get your loan paid off in a reasonable period of time. However, with credit cards, you're only obligated to pay the minimum, an amount that is often significantly less than you should pay if you're carrying a balance. It's up to you to do the right thing to get your balances lowered, even if the immediate pressure to make proper payments is decreased.


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