So you were directed to this section because you’re currently paying down a secured debt, most likely a mortgage or car loan – but what exactly is secured debt? Well there are two types of loans/debt: secured and unsecured. Unsecured debt is anything that does not have a direct, tangible form of collateral attached to it, like a non-specified personal loan or credit card debt. Secured debt is that which DOES have some tangible form of collateral – in the case of a mortgage, this would be the house or property, and in the case of a car loan this would be the car itself.
Secured debt is given this name because the lender basically has guaranteed recourse if the borrower defaults on their loan. Foreclosures are a common result of borrowers defaulting on their mortgages. The lending bank seizes the property and then sells it off in order to recoup the majority of their financial loss.
Borrowers with secured debt are also required to insure the “collateral” in case anything were to happen to the property or car. This is why new homeowners are required to maintain an insurance policy for their new home and one of the reasons why auto insurance is mandatory for many car owners. This way, if any damage occurs to the property the lenders will be reimbursed for the lost value.
Since mortgages and car loans are the most common types of secured debt, we’re going to focus on those in detail. But many of these tips can be applied to a variety of loan types, so don’t go too far!
We understand that you’re likely here because you already have some form of secured debt, but we also want to offer some guidance for those who either have not yet applied for a secured loan or who will be looking for another in the future.
Fixed – These are the more popular type of secured loan. Lenders offer a set interest rate and payment plan based on the amount and length of the loan. Your interest rates will not be subject to swings in the market.
Adjustable – Less common than fixed-rate loans, mostly because of their tendency to change with the financial market. Interest rates will likely be lower than a fixed-rate loan at first, but may grow if the market changes for the worse. Adjustable rate loans are a bit of a gamble, because you might be able to take advantage of lower rates but always run the risk of the market suddenly changing.
How to Manage Your Mortgage
The most common type of mortgage is a fixed-rate, 30 year loan. While this payment schedule is the easiest option for most middle-class homeowners to budget for right off the bat, the sheer length of this loan means that interest ends up being a huge chunk of your final balance. While it’s not feasible for the vast majority of new homeowners to choose the 15 year payment plan offered by most lenders, you will likely have the opportunity to refinance – which basically means moving the current debt from one set of terms to another at a time when you are more financially successful – during the time you are paying off your mortgage.
Even if you are unable to currently refinance, or simply choose not to, the best thing you can do for yourself and your mortgage is to pay it off as quickly as possible. This could mean shaving off a couple months’ payments or several years, but you will save an astounding amount on interest just by doing this.
There are several recommended strategies for edging yourself ahead on your mortgage without crippling yourself financially:
How to Manage Your Car Loan
Many of the techniques for paying off a mortgage successfully apply to car loans as well, just on a smaller scale. The industry standard for auto financing tends to be a fixed-rate 5 year loan, though these loans may offer more flexibility than a mortgage when negotiating terms. Many popular car publications use this standard 5 year loan to determine the ultimate cost of a new vehicle, including estimated interest and maintenance costs during those 5 years.
All of the mortgage tips above can be used for a car loan, but we have one more tip that might make financing your new car a little less painful:
While you may feel bogged down by secured debt, remember to think of it as an investment in your future. Like any other large purchase, make sure you are shopping within your budget, opting for the best rates, and maximizing your down payment before committing to anything. As long as you are realistic about your finances, you can have a stress-free experience with your new home or car, and enjoy it for years to come.
Secured Debt Checklist: