The Problem of Unsecured Debt
An unsecured debt or loan is not a financial obligation secured by an
asset or collateral. Unsecured debt is basically the exact opposite of
secured debt. Thus the concept of unsecured debt is better understood when
secured debt is considered. A sound example of secured debt would be a
mortgage or a car loan. The financial institution loans out money to a
lender who uses it to buy a house or car; the house or car becomes the
asset backing the loan. So the problem of unsecured debt is that there is
no collateral securing the loan.
So with unsecured debt, a lender loans money without the security that
a physical asset provides. For this important reason, unsecured debt
carries far more risk for the lender, which in turn makes the loan more
expensive to the borrower. It.s the additional risk that a lender must
take on and the higher interest rates the borrower must pay, which makes
unsecured loans subject to higher rates. Using credit wisely is the key to
having good credit and ultimately a sound financial future. The secret is
controlling debt, not letting it control you.
The problem with consolidating unsecured debt is that it's not the same
as paying it off. While consolidating unsecured debt can decrease monthly
payment, the debt still exists. Far too often, people consolidate their
unsecured debt, only to increase their credit card balances. Studies show
that nearly two-thirds of the people who borrowed against their home
equity from 1996-1998 to pay off credit cards had run up even more card
debt within the next two years. To successfully reduce debt requires the
individual to make significant lifestyle changes and permanently alter
their spending habits. Consolidating unsecured debt can help, but you need
a plan and you need to stick to it.
Dealing with unsecured debt problems can be the start of rebuilding
your financial future. The key to a sound financial future is saving, not
debt. It.s difficult, or impossible to build savings when suffering under
crippling credit card or other unsecured debt. Reducing and ultimately
wiping out unsecured debt is important to creating a foundation to an
investment strategy and financial freedom. Important life goals, like
college for the kids or an early retirement, depend on personal savings.
Without savings, the average family.s financial future can look grim
indeed. Learning to take control of one.s financial future is essential.
