Hitch Logo

Secured vs. Unsecured Loans: Understanding the Key Differences

blog-post

Mar 8, 2023

Share

email
link
twitter
facebook
linkedin

Table of Contents
I. Introduction: Secured Versus Unsecured Loans
II. Record Consumer Debt Figures
III. Your HELOC Insurance Protection
IV. Types of Secured Home Debt
V. Good and Bad Debt

I. Introduction: Secured Versus Unsecured Loans

Loans can be offered either as secured or unsecured. Common examples of secured loans include home mortgages and automobile loans. If you default, the lender will take back your collateral by way of foreclosure or repossession actions. Conversely, unsecured loans include credit cards, school loans, and other types of personal or business loans where effectively you or your credit scores are the collateral.

Either way with secured or unsecured loans, a steady payment history will likely boost your credit scores while missed payments will hurt your credit scores. Rates and fees for secured loans are usually more affordable than riskier unsecured loans which don’t really offer any collateral for the lender.

Medical bills and divorce are two of the main causes of unexpected bills and financial insolvency across the nation. Few of us like to see rising costs like more clearly seen in our grocery carts as prices rise and the number of food and drink items decrease at the same time. What’s your plan to create a safety net to cover expenses which may be rising at a faster pace than your income?

Short-Term Cash Supplies
It would take anywhere between 62.5 days up to 80.8 days for a resident of these Top 10 most expensive regions in the nation to run out of cash if they had average American savings amounts of $9,647, based upon a recent study from ConsumerAffairs.

Here’s the Top 10 most expensive regions in the nation and the estimated time that it would take to run out of cash:

Hawaii (62.5 days)
California (64.4 days)
Washington, D.C. (72.1 days)
Massachusetts (73.6 days)
New Jersey (74.8 days)
Connecticut (76.3 days)
Maryland (77.9 days)
Washington (79 days)
New York (79.9 days)
Colorado (80.8 days)

Living Wage Trends

A GOBankingRates survey that was shared in July 2022 found that the median annual living wage, which is defined as the minimum income amount needed to cover expenses while saving for retirement, is $61,617 per U.S. household. However, the Top 14 most expensive states in the nation required much higher annual household income or living wages as provided below:

  1. Hawaii: $132,912
  2. New York: $101,995
  3. California: $94,778
  4. Massachusetts: $86,480
  5. Alaska: $85,083
  6. Oregon: $82,926
  7. Maryland: $82,475
  8. Vermont: $78,561
  9. Connecticut: $76,014
  10. Washington: $73,465
  11. Maine: $73,200
  12. New Jersey: $72,773
  13. New Hampshire: $72,235
  14. Rhode Island: $71,334

Hitch has leveraged and combined advanced technology, the online loan application process, and access to capital for our clients so that it’s more simple and at a faster application and approval pace. To learn more details about the Hitch digital HELOC, check what your offer could be here.

II. Record Consumer Debt Figures

Total US household debt: $16.5 trillion
Residential mortgage debt: $11.7 trillion
Student loan debt: $1.57 trillion
Auto loan debt: $1.52 trillion
Credit card debt: $930 billion

In November 2022, households increased their debt at the fastest pace in 15 years due to rising increases in credit card usage and mortgage balances. Total credit card balances jumped more than 15% from the same period one year earlier in 2021, which was the largest annual increase in more than 20 years as per the New York Fed. Total annual rates and fees for credit cards reached all-time record highs thanks to the ongoing series of rate hikes by the Federal Reserve dating back to early 2022.

In the third quarter of 2022, total consumer debt for Americans rose by $351 billion between just July and September. This was the largest quarterly increase since 2007 while bringing total overall consumer debt to a new record of $16.5 trillion. This was an increase of 2.2% from the previous quarter and an 8.3% year-over-year increase.

New and used automobile loans also reached all-time record highs in recent times. In late 2022, automobile loans hit $1.52 trillion dollars. The automotive research company named Edmunds released data showing that the average monthly payment for a new car was $717 and $563 for a used car near the end of 2022. By comparison, new and used cars five years prior were $525 and $389, respectively.

More surprisingly, Edmunds reported that almost 15% of drivers were paying more than $1,000 per month for a new car in late 2022. An estimated 5% of consumers who financed a used car were paying more than $1,000 per month as well. Interest rates for both new and used car loans can exceed 10%, 15%, or 20% while the same car asset tends to rapidly fall in value as time moves forward.

More than 25% (1 in 4) car buyers in Wyoming and 20% (1 in 5) in Texas agreed to $1,000 or higher per month automobile loan payments. This is due to the much higher volume of pricey truck sales in these states. California (18.3%), Utah (19.1%), Colorado (17.4%), Kansas (17.5%), and Montana (19.1%) all had very high numbers of state residents who paid more than $1,000 per month for auto payments.

Rates on automobile loans have absolutely spiked over the past year. Near the start of 2022, new automobile loans for many creditworthy borrowers were near the 3% and 4% rate ranges. As 2020 moved forward with multiple Federal Reserve rate hikes, the average rate for new car and used car loans reached near 6.5% and 10%, respectively, according to Edmunds.

Holiday Debt

An estimated 35% of respondents amassed significant holiday debt. Americans racked up an average of $1,549 for holiday debt through December 31, 2022, as per a LendingTree survey. This holiday debt number was up 24% as compared to the previous year and the highest in the eight-year history of LendingTree’s survey.

As of early January 2023, the average credit card interest rate carrying charge reached 19.2%, according to MoneyGeek. Yet, the total APR (Annual Percentage Rate) for a credit card cash advance rose to a staggering 25% rate.

If you pay the minimum payment on a credit card debt that’s over a few thousand dollars, it may take you more than 30 years to completely pay off the debt in full. By comparison, a secured HELOC loan that may be tax-deductible (check with your tax advisors) is usually much more affordable than an unsecured credit card loan.

Another unexpected debt that has been skyrocketing in recent years is related to homeowners insurance. For example, some insurance industry analysts predict that the average homeowner in Florida may pay an additional 40% more in insurance premiums in 2023 partly due to recent storms like Hurricane Ian and other flooding risks.

In 2022, six different insurance companies - FedNat, Weston Property and Casualty, Lighthouse, St. John’s Insurance, Southern Fidelity, and Avatar - stopped operating in the state, as per the Florida Insurance Guarantee Association, because they couldn’t cover their debt obligations related to high premium payouts for storm damage and other factors.

Let’s quickly review the Top 10 most expensive states for year-over-year insurance premium rate hikes as of May 2022 as per Policygenius:

1. Arkansas: 18.5%
2. Washington: 18.1%
3. Colorado: 17.5%
4. Texas: 16.0%
5. Oregon: 15.4%
6. Arizona: 14.8%
7. Utah: 14.1%
8. Minnesota: 13.9%
9. North Carolina: 13.7%
10. Illinois: 13.6%

While Florida may not be #1 yet on the list above, it may be sitting on top by the end of 2023. Either way, the many different double-digit insurance premium rate hikes have been on a pace that exceeds the national published inflation rates near 8%.

Because most people have at least one mortgage on their property, they are required to maintain their homeowners’ or landlord insurance policies to protect both the property owner and the lender. If not, the mortgage lender has the legal right to file a foreclosure notice against the property owner as if they’d missed several mortgage payments.

III. Your HELOC Insurance Protection

Another unexpected debt that has been skyrocketing in recent years is related to homeowners insurance. For example, some insurance industry analysts predict that the average homeowner in Florida may pay an additional 40% more in insurance premiums in 2023 partly due to recent storms like Hurricane Ian and other flooding risks.

In 2022, six different insurance companies - FedNat, Weston Property and Casualty, Lighthouse, St. John’s Insurance, Southern Fidelity, and Avatar - stopped operating in the state, as per the Florida Insurance Guarantee Association, because they couldn’t cover their debt obligations related to high premium payouts for storm damage and other factors.

Let’s quickly review the Top 10 most expensive states for year-over-year insurance premium rate hikes as of May 2022 as per Policygenius:

1. Arkansas: 18.5%
2. Washington: 18.1%
3. Colorado: 17.5%
4. Texas: 16.0%
5. Oregon: 15.4%
6. Arizona: 14.8%
7. Utah: 14.1%
8. Minnesota: 13.9%
9. North Carolina: 13.7%
10. Illinois: 13.6%

While Florida may not be #1 yet on the list above, it may be sitting on top by the end of 2023. Either way, the many different double-digit insurance premium rate hikes have been on a pace that exceeds the national published inflation rates near 8%. The average annual home insurance policy price in 2023 is $1,516, which is almost 40% higher than 12 years earlier in 2011 as per Moneywise.

Because most people have at least one mortgage on their property, they are required to maintain their homeowners’ or landlord insurance policies to protect both the property owner and the lender. If not, the mortgage lender has the legal right to file a foreclosure notice against the property owner as if they’d missed several mortgage payments.

Ironically, the Hitch digital HELOC can be your best “insurance” protection against rising insurance costs and other monthly expenses because it gets you more access to cash.

IV. Types of Secured Home Debt

What exactly is a HELOC (Home Equity Line of Credit)? First off, a HELOC can be visualized as if it were your household’s safety net that’s secured to your property with a recorded lien and a promissory note (IOU for the debt). It’s a revolving credit line with monthly payment options that usually begin with relatively lower interest-only payments on the funds borrowed during the initial draw period. You only pull out or draw money as needed and have the option to pay it back as quickly as possible.

Sometimes, you may choose to maintain a zero balance with no monthly payments required. Other times, you may have some higher monthly expenses which inspire you to borrow from your HELOC credit line to cover the expenses for up to 30 years.

How does a HELOC differ from a fixed rate mortgage? Generally, interest rates and monthly payments for a fixed rate mortgage are higher than HELOC rates and the borrower pays all of the interest due on the entire principal balance at closing.The loan terms can be much shorter and the maximum loan-to-value (LTV) allowances are lower than HELOCs for periods of time that can range from 3, 5, 7, 10, or 15-year mortgages.

secured-creditors.jpg

V. Good and Bad Debt

There’s good debt and there’s bad debt. When you own a home, you love inflation because real estate generally rises at least as high as the annual inflation rates like a buoy with the rising tides. However, inflation also severely damages the purchasing power of the dollar as your grocery and utilities bills may double or triple over the years.

If you own a home with one or two mortgages on it that’s increasing at a pace of 6% per year, it may double in value within 12 years by way of the Rule of 72 investment formula (72 divided by an expected 6% rate of turn equals 12 years to double in value). For example, a home valued at $400,000 in 2023 may double in value to $800,000 twelve years later in 2035 if the annual appreciation rate grows by 6% per year (72 / 6 = 12 years).

For your mortgage debt, it’s actually halved during the same 12 year time period as the dollar gets weaker. Or, a $500,000 mortgage today may be equivalent to a $250,000 mortgage in 12 years due to inflation and a much lower purchasing power for the dollar. To get started on unlocking the value of your home, click Digital Hitch HELOC

Borrow from yourself, not the bank!

See your equity and HELOC rate in seconds

Equal Housing Lender
Hitch, Inc. 23833672158 NW Toussaint Drive. Bend, Oregon 97703

1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.5. The content provided is presented for information purposes only. This is not a The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.