Many strategies to pay off debt fail because there’s no real enthusiasm behind them. You may start out fully motivated to become debt free, but you can easily become disheartened at the time and lose the effort it takes to see your plan all the way through. If you want to keep momentum in your debt payoff, you have to repeatedly remind yourself of the motives you have to get out of debt by inspecting your bookkeeping records in detail.
A secured debt is one that is backed by some sort of collateral or asset. This mainly means that the creditor will “hold” the collateral until you pay off the loan. While the asset is held as insurance or security for the loan, you cannot deal with the asset in any way without the moneylender’s consent. If for any purpose you default on the debt, the financier has the right to take proprietorship of the asset and sell it to repay the debt. This is also recognized as “foreclosure” or a “mortgagee sale”. Typically, secured loans draw a lower rate of interest. That is because the risk involved for the lender is a little less. The creditor will not usually lend 100% of the value of the asset because the lender is decreasing its risks of sustaining a loss in the event of foreclosure.
Many businesses owe secured debts—companies usually pledge collateral for credit lines and business holders often pledge their personal property for corporate debts.
For instance, if you miss a payment or two on your car loan, the creditor has the legal right to physically repossess the car and sell it to recover the money you owe plus the costs of the sale and attorney’s fees. To do this, the investor does not have to get consent or a court judgment. Under the terms of the agreement you signed with the lender, a repo man can regain the lender’s property. When all is said and finished, you will still owe the difference between what the creditors sell the car for and what you owed on the loan, called a “deficiency”. Also, the repossession will appear on your credit report for seven years.
Cars are the most commonly repossessed type of property, but if you have borrowed money to buy business equipment or machines and used the purchased equipment as security, the creditor will have the same repossession privileges.
If you have a mortgage, deed of trust in your house, or an open home equity line of credit, you must make payments on time to keep the house. If you don’t, the creditor can and possibly will foreclose on your house because it is collateral for your debt. But foreclosures are not as swift as vehicle repossessions. Likewise, if you pledge your home as collateral for a corporate loan or line of credit and you default on that loan, the lender can foreclose on your house. To avoid having the lender foreclose, you must either repay the debtor, if the debt is more than your equity in the house, or at least pay the moneylender that sum so that it no longer has a reason to foreclose.
The foreclosure procedure works differently in different countries. A judicial foreclosure normally takes a few months longer than a non-judicial foreclosure, giving you time to save some cash and, if required, find a new place to live.
If you’re behind on your debt, you might be able to negotiate a loan modification with your creditor. Your other options are selling your home for less than you owe (called a short sale) or returning the deed to the lender (called a deed in lieu of foreclosure).
Defaulting on a personal loan will bring numerous consequences depending on how the loan agreement was initially attained and how were your bookkeeping records defined. Defaulting on any type of debt, large or small, will have universal financial consequences.
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