In 2025, debt will be crushing American households. Recent Achieve Center for Consumer Insights survey revealed that 28% consumers had their debts increase in the fall of last year, and many were struggling to pay for basic necessities such as food and housing. Inflation, student loan repayments and unexpected medical expenses are driving more people to use credit cards to cover their bills .
Debt can spiral out of hand when interest rates are at an all-time high. Even a few missed payment can have severe consequences. It is important to know the difference between secured and unsecured loans before borrowing money. Each type of debt comes with its own set of risks that can impact your finances over many years.
Learn how to start paying off your debts today.
Unsecured debt vs. secured debt: What you need to know now
The level of risk is the main difference between secured debt and unsecured loans.
Adrienne Hines, an attorney specializing in bankruptcy, explains how secured debt provides lenders with “security” by using valuable assets like your car or home. Unsecured debt is based on your promise to pay. Lenders may increase interest rates if they do not have collateral to protect them. They also require high credit scores.
Understanding secured debt and the risks
Secured debt can be backed up by collateral, or hard assets.
- Mortgages
- Car loans
- Home equity loans (HELOCs), also known as home equity credit lines, are a type of loan that allows you to borrow against your equity.
- Secured credit cards require a cash deposit
If you fail to pay any of these debts, the consequences can be swift and severe.
Ashley Morgan, a bankruptcy and debt attorney at Ashley F. Morgan Law, warns car lenders that they can repossess a vehicle even after one missed payment. However, most will wait until 90 days have passed. Falling behind on your mortgage can lead to foreclosure, which puts your home at risk.
Financial damage does not stop with losing your home. Gwyneth Borden, founder of Remynt and debt expert, says that if your car or home is repossessed and sold, you could be liable financially for the difference between the purchase price and the foreclosure value. You could owe thousands of dollars even after you lose your asset.
Talk to an expert in debt relief about your options.
Unsecured debt: The basics
Unsecured debt does not require collateral. Here are some of the most common examples.
- Credit Cards
- Medical Bills
- Student Loans
- Personal Loans
These debts are not secured by your property, but they do carry other risks.
Hines warns that “unsecured lenders have become more sophisticated in their targeting of desperate people.” They’re trapping people in a daily compounding cycle of interest (that can last decades).
Missing payments can damage your credit score, making recovery even harder. Credit marks can prevent you from getting a loan, renting a home or being approved for a credit card.
How to tackle debt in a direct manner
Understanding where your money is spent is the first step to getting out of debt . Morgan explains that budgeting, although it may seem simple, is the best way to start getting your finances in order. You can find ways to save money by tracking your monthly spending and credit card balances.
Experts recommend that you consider these proven strategies for debt relief in addition to budgeting.
- Consolidate your debts: Borden recommends consolidating debts with high interest rates into one loan at a lower rate if you have good credit. Be careful to not rack up more credit card debt once you consolidate.
- Speak to your creditors.Some lenders have hardship programs which can reduce your interest rates or restructure your payments. You can save money by avoiding debt relief companies.
- Consult with a bankruptcy lawyer: Most people do not realize that their retirement plans or equity in their home are protected (in part or whole) if they declare bankruptcy, explains Hines. You can learn more about your options by requesting a free consultation.
- The snowball method can help you stay motivated. Start by paying off the smallest debts. You can use the money you save to pay down your debts.
- Use the avalanche technique:Pay off the debts that have the highest interest rate first, while paying the minimum on the rest. This strategy will save you money on interest charges over the long term.
The Bottom Line HTML0
Hines emphasizes that “to fix [secured and unsecured] debt you [must] [be] honest about how [much] [you] [have] [and] be open to exploring [all] available ways to [manage] it.” One conversation with a bankruptcy attorney, credit counselor, or financial advisor can lead to possible solutions that you may not have known existed.
Unsure where to begin? Experts suggest starting with a simple monthly budget to avoid adding more debt. You can then decide if debt relief would be a good option for you. The avalanche method can save you money on interest, while the snowball approach offers quick results. Bankruptcy might be a good option for a fresh start.
