Secured vs. Unsecured Debt

As you make a plan to reduce your debt, you want to make sure that you’re doing it in a way that’s going to give you the most bang for your buck. Different types of debt function in different ways, including how much of a benefit you get from paying more than the minimum amounts due on your monthly bills. You get more benefit from paying down unsecured debts, such as your credit cards, versus paying down secured debts like your mortgage.

If you need help to create a strategy to reduce your debt, give us a call at . A certified credit counselor can assess your debts with a free debt consultation and offer advice on how to eliminate debt in the most effective way.

 

Why is paying down unsecured debt more effective?

Unsecured debts, such as your credit card debts, typically have a revolving payment schedule. This means that the amount you owe each month isn’t constant—it changes based on how much total debt you owe on each credit card account. The higher your credit card balance, the more money you have to pay on your bill. In contrast, the more you pay off your debt on a credit card, the lower your payments will be each month.

Putting any extra money you have towards paying off an unsecured debt provides a greater benefit to your monthly finances, because you’re reducing the minimum amount that will be due on the next bill. This effectively means you’re freeing up even more money in your monthly budget with each unsecured debt you pay off.

When you decide to reduce your debt load by paying off unsecured debts, there are a few different debt reduction strategies you can use depending on your financial situation. Just remember with any strategy you choose, always pay the minimum amounts due on every bill before you put any extra money towards paying debts off. If you have questions about which strategy to use to reduce your debt, give us a call at to speak with a certified credit counselor.

 

Do I gain any benefit from paying down secured debt?

Almost all secured debt payments are fixed, which means you pay the exact same amount every month no matter what happens to your balance. In this sense, if you put extra money towards paying down the balance on a secured debt, you don’t get any short-term benefit because your debt payments the next month will still be just as high. Whereas paying down unsecured debts provides a benefit each month by reducing your total amount owed, you have to pay off a secured debt completely to see any change in your monthly finances.

For this reason, paying off unsecured debts first makes more financial sense, because you’re improving your finances overall AND improving your monthly budget at the same time. There are advantages to paying down at least some secured debts like your mortgage, but the benefits are more long-term than short-term. In addition, you will need more money to make any great financial impact, because mortgage payments work a bit differently than other debt or loan payments.

If you put enough extra money towards paying down your mortgage, you can not only reduce the total amount owed, but you can also reduce the interest rate you’ll be charged for the remainder of your mortgage payments. Even so, many financial experts argue that putting extra money towards paying off your mortgage faster could actually be better spent by investing. In any case, it’s more advantageous to pay off your unsecured debts first, as well as doing things that provide a real financial benefit, like contributing to savings or retirement accounts.

If you have questions about making extra payments on your mortgage, let a certified housing counselor explain how paying down your mortgage works and how much money you’ll need to really make the impact you want. Give us a call at to speak with a housing counselor and review your options.