Secured Debt
Bad Debt Consolidation by splinder
Filed under Understanding Debt
Secured debt is a loan that is backed by some asset as collateral, which is generally a property or a vehicle. This collateral enables creditors to seize the asset pledged by a debtor in case of defaults on repayments against the loan.[br]
A secured debt is appropriate and profitable, or in some cases the only alternative, when:
· The amount of debt is large. In such cases, creditors are hesitant to extend credit as the risk of loss is greater. Common forms of secured debt are higher education and car loans.
· Credit history is poor. A low credit score is illustrative of a person’s inability to meet debt obligations. Therefore, individuals with a poor credit histories are generally offered debt only when they guarantee an asset as collateral. Besides, such individuals barely qualify for unsecured debt, and even if they do they have to pay higher interest rates.
· Unsecured debt is inaccessible. If a person already has several open lines of unsecured credit, new as well as existing creditors may shy away from extending further credit, even if payments are made diligently.
Why Acquire Secured Debt?
While the benefit of secured debt over unsecured debt for a creditor is clear, for their part, debtors are hesitant to take a secured debt due to the inherent risk of losing the asset. However, even debtors stand a chance to gain from unsecured debt as it has the following advantages:
· Initial repayment holiday: This implies that a debtor is freed of the obligation to make any installments for a defined period, which may be as high as 5 months. This enables the debtor to consolidate, reorganize and plan repayments more effectively.[br]
· Repayment incentives: The monthly payments on secured debt are generally lower than that of unsecured debt. Besides, the repayments under a secured debt can be spread over a longer duration, enabling to reinstate a good credit status more effectively.
· Fixed interest rates: Most secured debt come with a fixed interest rate for a predetermined period. This frees a debtor from the vagaries central bank decision and economic fluctuations. Therefore, one can plan the repayments and incorporate it in the monthly budgeting well in advance.
A secured debt can not only aid an individual with a bad credit history to get back on track, it is also useful for individuals seeking to maintain a good credit score.