It is known, there is a lot of jargon in the field of finance. Many terms are commonly used by financial institutions, but they are not always understood by consumers. The difference between secured and unsecured debt is a good example of this problem.
It is important to understand the concept of secured or unsecured debt because in the event that you can no longer make your payments, this notion will have a big impact on you.
What is a secured debt?
A secured debt is when the lender / creditor has the right to seize the property if you default on your payments. The most common example is auto loan. If you can no longer make payments on your car loan, the institution that financed your car can seize it. Once seized, she will resell it to recover her money. Very often the proceeds of the sale will not be enough to make up the total loan so you will still need money from the institution.
Be aware that for a debt to be guaranteed you must expressly agree to this guarantee and it must specifically designate the property as collateral. Not all types of property can be guaranteed and creditors are not entitled to seize you unless there is a clause to this effect in your agreement.
What is an unsecured debt?
The term “unsecured debt” refers to all other types of debt that have no collateral. In this category we find credit cards, lines of credit, personal loans, contract-related debts and money from your relatives. A creditor with this type of debt does not have the right to seize you if you do not pay your debt.
Why is this difference important?
In the event that you are no longer able to make your payments, depending on whether your debts are secured or not, it could make a big difference. Whether you consider personal bankruptcy (more info) or the consumer proposal (more info), if you want to keep your property secured, you will have to continue making your payments. This can be an advantage if you want to eliminate your secured debts while keeping your property like your car and your home.
If you are unsure of what types of debt you have or want to know what the effect of a bankruptcy or consumer proposal would be in your case, contact us toll free. We will be happy to answer all your questions.