Understanding Debt: Home and Auto Loans

Buying a home or a car can be a fun and exciting time, but also a little scary. You’re signing on the dotted line for a significant loan you’ll be paying off for many years to come. For the past two weeks, we covered different types of unsecured debt: credit cards and student loans. This week we move on to secured debt, and what makes it different.

Buying larger items, like a car or home, usually requires longer term loans. That means the lender has more risk of losing their money by not being paid back. That’s why auto loans and mortgages are secured debt. The asset you purchase becomes collateral that backs up the loan. The lender can seize the asset if you get too far behind on the payments. Think about it – how long would you lend someone money without some type of guarantee you’ll get your money, or something else valuable, in return?

If you miss too many mortgage payments, the lender can put the loan in foreclosure, take the home and sell it to recoup some or all of their loss. Auto loans (including trucks, motorcycles and recreational vehicles) also count the asset (vehicle) as collateral and missing payments can result in repossession. If you still owe more than the car is worth they can even send the difference to collections so you’ll be without a vehicle and still owe them money. Missed payments, foreclosure, and repossession have a serious impact on your credit score that can take years to rebuild. If you find yourself in a situation where you can’t make all your payments, reach out to your lenders about any relief or hardship plans they may offer. Focusing on your secured debts is usually the best choice since you stand to lose that important collateral, your home or car, if you don’t pay.

To read more about these and other types of secured debt, read our full article here.