Secured vs Unsecured Loans

: Chris Lee Law Firm

  Filed under: Loans

When it comes to taking out a loan, you should know they are not all the same. Different types of loans each have their own benefits and risks. If you get into financial trouble and cannot repay your loans, you may risk losing your property. Not all loans are eligible to be discharged bankruptcy, and you may end up deeper in debt trying to repay these loans.Secured vs Unsecured Loans

Secured Loans

A secured loan is a type of loan where the borrower puts up an asset as collateral. The debt that is accumulated under a secured loan is secured against the collateral. A home or car is the most common type of asset used as collateral in a secured loan. A secured loan grants the lender rights to the property used as collateral, in the event the you default on the loan. If you default on the loan, the lender can take possession of the asset used as collateral. The lender may sell the asset in efforts to satisfy the debt owed on the loan. If the sale of the asset does not satisfy the full amount of the debt that is owed, you may still be held liable for repaying the remaining amount owed on the debt.

A mortgage loan is the most common type of secured loan. If you default on your mortgage payments, the lender may place your house into foreclosure. In a foreclosure, you will be required to vacate the property and your rights to the home are terminated. A car loan is another example of a secured loan. Defaulting on a car loan can lead to repossession.  Certain types of personal loans, such as a payday loan, are also secured loans. Many payday loans will require you to put up the title to your car as collateral for receiving the loan.

In the event of financial hardship, secured loans make protecting your assets in bankruptcy a bit more difficult than an unsecured loan. A Chapter 7 bankruptcy can eliminate the debt owed on a secured loan but you may risk losing the property to the lender. Some assets may be seized and liquidated during bankruptcy in order to fulfill the debt payments. However, state bankruptcy laws may offer exemptions for some of your assets. Most of the time these exemptions will allow for your home and car can be protected from liquidation during bankruptcy.

Unsecured Loans

An unsecured loan is a loan in which you have no asset used as collateral for the loan. The loan is unsecured because it is based on your promise to repay the debt. In general, the lender is not given any rights to a specific asset. If you default on the loan, the lender may have rights to liquidate your assets in bankruptcy in order to reclaim the money owed.

Credit cards are the most common type of unsecured loan.  If you default on a credit card loan, the credit card company may attempt to collect on the debt, but there is no specific asset they can reclaim in order to satisfy the money owed.  Some personal loans are considered unsecured loans if you did not put up any of your property as collateral for the loan. Defaulting on unsecured loan payments can lead to negative consequences such as damage to your credit, harsh collection attempts and legal action. Student loans are another type of unsecured loan that are based on your agreement to repay the loan. Defaulting on a student loan payment is treated seriously by the lending institution and federal bankruptcy laws do not protect borrowers that default on a student loan payment.

Unsecured loans are much easier to have discharged through bankruptcy than a secured loan. Since there are no assets used as collateral, the risk of losing your assets is less than in a secured loan.  In some cases, the bankruptcy court may decide to allow for some of your assets to be liquidated to fulfill debt payments. However, much your property can be protected through bankruptcy exemptions.

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