What’s the Difference Between Secure and Unsecured Debt

What’s the Difference Between Secure and Unsecured Debt

secure debt

If you’re going through the process of applying for title loans, registration loans, bank loans, or considering consolidating your debt, the phrases “secure” and/ord “unsecure” debt have probably come up at least once so far. You may have smiled and nodded, and pretended like you understood every piece of insane lending jargon they threw at you. But inside you were screaming, “Wait, what is that? Is that important?! Should I know this?!”

 

Short answer: you should know it in order to fully understand what you can expect out of your new financial situation. Here’s your chance!

 

Understanding Creditworthiness

 

So the first thing you need to know before moving on to secure and unsecured debts is how creditworthiness works. Essentially, when a loan applicant approaches a credit-provider, the credit-provider wants to know that you’ll be able to pay them back their money; it’s a matter of safety for them.

 

The more proof you have that you can pay off that debt (and/or that you have successfully paid off your debts in the past) then they’ll be more likely to trust you with a loan. Creditworthiness is typically measured by two indicators:

 

  1. Your credit score and financial history.
  2. Your list of collateral or assets.

 

First they’ll check your credit and financial history. If you have a history of paying all your bills on time, not owing any money to anyone, you have a steady source of income, and so on… then they’ll consider you an ideal candidate for a loan.

 

But if your credit score is subprime and you lack positive financial history, they’ll move on to any collateral or assets that you may own. These possessions hold value, so they can be put up against the loan as a form of collateral insurance that the creditor will get their money back.

 

Unsecured Debt

 

Most forms of unsecured debt come from the first of the two types of creditworthiness indicators: credit score and financial history. The loan is based solely on your promise that you’ll pay on time. I.e. it’s not secured by any physical possessions, assets, or collateral, therefore… ‘unsecured.’

 

Unsecured debt is more likely to feature higher interest rates than secured debt, because the credit-provider really only has your word. That makes it a riskier loan for them to give out, so they compensate that risk with a higher rate of interest.

 

Secured Debt

 

Since secured debt requires you to provide the credit-provider with some form of collateral, the interest rates are usually lower because the bank has a physical and more tangible guarantee that you’ll pay them back. One example of a secured loan is a mortgage. Your house is the collateral in that example.

 

That’s why banks require the lender to get home insurance in order to apply for a mortgage; they want you to protect their asset in case you default on the loan and they need to sell your house to recoup the money that you lost them.

 

Secured debts can be used with cars, property, businesses, and other types of assets and resources that the creditor approves as having good equity.

 

Credit Card Tips For Building Responsible Credit

Credit Card Tips For Building Responsible Credit

building resonsible credit

People who are intelligent with their finances realize that credit cards are an important tool in being financially responsible. Credit cards are a good thing to use for daily purchases. If you are also responsible with your credit card you’ll be gaining an excellent credit score with every purchase made. Here are some major credit card tips that will assist everyone in becoming more responsible and building up an excellent score.

Balance Alerts & Analysis

By paying for everything on credit it allows for you to consolidate finances and paying off bills on a month to month basis. Keeping a watch on credit card balances will be helpful with alerts. Spending limits can be made and when they go over certain limits

Keeping a watch on how much you’re spending with your credit card is easier than ever before. Most issuers allow you to set up balance alerts so that you’ll receive a text and an email whenever your total spending hits a certain threshold that you’ve set.

Another helpful service that is offered is receiving a notice when credit utilization ratios begin approaching the 30% mark. This way you’ll be able to pay before it can affect the credit score.

Spending analysis tools are under utilized tools that all major credit card accounts usually offer online in some sort of graph form. These are able to track daily, weekly, and monthly spending. Also in the long run it can show spending over the years. This analysis allows a breakdown of spending like food, travel, and merchandise and essentially anything else that can be broken down into different categories for spending. By using these tools they can utilize ways to better manage money and increase the credit score. They’re also beneficial in setting up a budget that can be followed.  Make sure to look for this tool next time when logging into the online platform as it can help dig deeper into finances and spending habits.

Mid Cycle Payments

As all credit card users know that there is monthly billing cycles. Often time’s people don’t realize that they can benefit their score by paying a few times a month or paying off the card in full on a month to month basis. Once a month the credit card issuer sends a report about the account to three different credit bureaus. This includes a variety of factors including your balance, utilization and any missed payments and other factors.

There are times that when the bill has been paid it has yet to be reported. If you’re in the habit of charging a lot per month, paying mid cycle can be a way to mitigate this and stay under the recommended 30% utilization rate. Using credit responsibly is a great tool and with these tips can help launch a responsible way to use credit. These are just simple tips to use with credit, but in the long run can be of immense help to credit users.