Understanding secured and unsecured credit

On Behalf of | Jun 30, 2019 | Bankruptcy |

There are many residents in North Carolina who find themselves facing levels of debt that they are unable to keep up with. For many of these consumers, a personal bankruptcy offers an opportunity to be free of unmanageable debt and get a fresh financial start. When choosing the right bankruptcy plan for their situation, a person should understand the two different types of debt – secured and unsecured.

As explained by NextAdvisor, the terms secured and unsecured are from the perspective of the lender. A secured loan, for example, is attached to an asset that can be seized by a creditor if the debt is not repaid. An example of this is an automobile loan where the bank can repossess the vehicle if the debtor fails to make payments. This reduces the level of risk a lender takes when extending credit.

An unsecured loan, on the other hand, has no associated collateral and therefore exposes the lender to a higher level of risk. It is for this reason that unsecured credit accounts generally come with higher interest rates than do their secured counterparts. Most credit cards are unsecured although there are some secured credit cards.

Money Under 30 explains that a secured credit card requires a consumer to essentially front some money that acts as their credit limit. This gives the bank access to funds if a person does not repay the debt. It is often a useful tool for people who need to rebuild their credit, such as after a bankruptcy.