When taking out a credit agreement, it’s important to know whether it’s secured or unsecured. Not all debt works the same way and knowing the difference can help you understand what’s likely to happen if you don’t pay it as well as which solutions can help you deal with it.
Some people don’t know whether they have secured or unsecured debt until they’re being chased for payment. However, having secured debt means your assets could be at risk of being seized if you don’t make up for the money owed.
What is unsecured debt?
Unsecured debt is debt that isn’t backed by collateral and doesn’t have an asset, like a property or a car, linked to it. In other words, none of your belongings will be sold to repay the debt in the event you don’t pay it.
Examples of unsecured debt include payday loans, student loans, overdrafts, store cards, credit cards, utility bills, and personal loans.
Because unsecured loans are considered riskier for the lender – because they have nothing to fall back on if you don’t keep up with your payments – they tend to carrier higher interest rates than secured debts.
However, while unsecured debt poses less risk compared to secured debt, you will still face consequences for not paying it and your credit score will still be damaged for several years. This can prevent you from getting a loan, mortgage, credit card, bank account, or even a phone contract.
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What is a secured debt?
Secured debt is debt that uses a valuable asset, such as your home or car, as collateral. This essentially means that, if you don’t keep up with your payments, the asset can be seized by the lender (e.g. your mortgage lender can repossess your home if you miss several payments).
The most common types of secured debt are a car loan, a mortgage, and a home equity loan.
Having a guaranteed way of recovering the money can give lenders more peace of mind when giving out secured loans. Because of this, you might benefit from lower interest rates, better terms, and higher approval rates.
What is the difference between secured and unsecured debt?
No matter how much debt you have, it’s important to know whether it’s secured or unsecured.
Here are some of the key differences between secured and unsecured debt:
Interest rate
One of the key differences between secured and unsecured debt is that unsecured debts typically have higher interest rates compared to secured debts. This is because an unsecured loan gives the lender nothing to fall back on in the event you don’t pay.
In contrast, a lender can seize your assets to recover payment if you default on a secured loan, so there’s not as much of a need to charge more in interest.
Loan amount
The amount of credit offered to you also depends on whether the loan is secured or unsecured. Secured loans have the added security of collateral, so tend to allow for higher loan amounts.
However, lenders will be less likely to offer you higher loan amounts if they have no security.
Consequences of non-payment
Perhaps the biggest difference between secured and unsecured debt is what can happen if you don’t pay it.
The most common thing that will happen if you don’t pay an unsecured debt is that your creditor will obtain a court order to recover the money through enforcement agents (bailiffs). Alternatively, your property or car could be seized if you continually fail to pay a secured debt.
Risk level
The level of risk involved differs between a secured and unsecured debt.
Generally, a secured debt favours the creditor while an unsecured debt favours the debtor. This is because a secured debt poses less risk to the creditor and an unsecured debt poses less risk to the debtor.
Credit score required
Typically, you’ll need a higher credit score to qualify for an unsecured loan to reassure your lender that you won’t default on your payments.
This also means that you don’t need as good a credit score for a secured loan as the lender can take possession of your assets to recoup the money if you don’t keep up with your repayments.
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From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
Which debt solutions deal with unsecured debt?
If you’re struggling with unsecured debt, it can be useful to know which solutions can help you deal with it.
Here are some solutions that cover unsecured debt:
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to repay your unsecured debt in monthly instalments over a set period (usually five years).
During an IVA, all interest and fees on the debt will be frozen and your creditors won’t be able to take legal action against you. This can allow you to make affordable payments towards the debt without any unnecessary stress or distractions.
Once your IVA concludes, any included debts remaining unpaid will be written off (wiped) and you’ll be free to make a fresh financial start.
Debt Management Plan
A Debt Management Plan (DMP) is an arrangement that allows you to repay your unsecured debt at a rate that suits you. The amount you pay each month will be worked out after a review of your monthly outgoings.
Because a DMP is an informal solution, there’s no guarantee that interest or fees will be frozen and you won’t be protected from legal action. This also means that you can cancel it at any time if you believe it’s no longer working for you.
There is no time limit for a DMP. It will last as long as it takes for you to repay 100% of your outstanding debt.
Debt consolidation
Debt consolidation is a way of taking out a loan to merge multiple unsecured debts into one monthly payment. In other words, instead of having multiple payment dates, you’ll make a single payment towards all your debts on the same date each month.
The money will be paid to the lender before being shared among your creditors.
One of the key benefits of debt consolidation is the ability to pay less in interest, which could result in you paying less towards your debt in the long run. However, because it’s still a loan, you might need a good credit score to qualify.
Can an unsecured debt become a secured debt?
It can be reassuring to know your debt is unsecured as opposed to secured as this means your assets are safe from seizure. However, in rare situations, your creditor can apply to the court for a charging order to turn an unsecured debt into a secured debt.
A charging order can be made against any asset that you have an ‘interest’ in, but it is usually made against your home. This means that, if you sell or remortgage your home while a charging order is in place, any money made must go towards repaying your debt first.
If you own your home jointly but the debt is only in your name, a charging order can only be applied to your share or ‘interest’ of the property.
Before a charging order can be issued, you must have already been issued with another court order, such as a County Court Judgment (CCJ). Even if you’re up to date with your CCJ payments, a charging order can still be made at any time.
What happens if I ignore unsecured debt?
Although your assets will usually be safe if you ignore your unsecured debt, creditors are often more aggressive in their approach to collecting unsecured debt as they can’t simply seize your home or car to reclaim the money owed.
Remember, any late or missed payments can affect your credit history and your ability to borrow money for several years.
Here are some of the actions your creditor can take if you ignore unsecured debt:
Hire debt collectors to collect payment
The first thing your creditor is likely to do when you ignore unsecured debt is hire debt collectors to visit you at home. They can’t legally force you to hand over money or seize any of your belongings, but they will continue to contact you until you come to an arrangement over the debt.
Send bailiffs to your home
As well as debt collectors, your creditor might send enforcement agents to your home to try to get you to pay the debt. The difference between debt collectors and bailiffs is that bailiffs have more legal powers to get you to pay the debt and can seize your belongings to recover the money.
Serve you with a County Court Judgment
If your creditor has failed to recover the debt through debt collectors or enforcement agents, they might apply to the court for a County Court Judgment (CCJ). This is a court order telling you to pay what you owe as per the court’s instructions (in full or in monthly instalments).
Apply for an attachment of earnings
One of the more serious consequences of ignoring unsecured debt is your creditor recovering the money owed by deducting it from your wages in set instalments until it’s fully repaid. This is a rare action and is usually only used in extreme circumstances (e.g. if you’ve continually ignored all attempts at settling the debt).
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Conclusion
Unsecured debt is the name given to debt that isn’t backed by collateral or attached to any of your assets. In other words, none of your belongings will be at risk if you have unpaid debts that are unsecured.
Because an unsecured debt presents more risk for the lender, it usually comes with higher interest rates. However, as long as you stick to your payments as agreed, you should have no problems.
If you’re struggling with unsecured debt, it’s important to get help as soon as possible. While you won’t lose your home or car, you can still be subject to legal action and extra fees.
