The Difference Between Secured Debt and Unsecured Debt

Debt is a necessary part of everyone’s financial life, and it is important to understand the differences between the various forms of credit available today on the market. In general, there are two types of loans, secured debt and unsecured debt. Both of these types of loans have distinct advantages and disadvantages.

About Secured Debt

Secured debt is a loan backed by collateral, that is, an asset which can be taken back or repossessed if the borrower is unable to make their payments. The most well-known examples of secured debt is a home mortgage.

Because the bank or lender has the option to take the assets of the borrower, secured debt typically has lower interest rates than unsecured debt. The amount of credit extended in these types of loans is based on the credit history of the borrower and the value of the assets being put up as collateral. Because of this, these loans tend to be issued for higher amounts than loans given out as unsecured debt.

About Unsecured Debt

Unsecured debt is a loan that is not backed by any collateral. The most well-known example of this type of debt is a credit card. Other examples include payday loans and personal loans. Unsecured means that nothing can be taken back by the bank in the event the borrower chooses not to pay. This means that the lender cannot take away the home, car, or other possessions of the borrower, nor can it garnish wages or government checks such as Social Security.

This type of credit is extended to a borrower based on his or her credit score and credit history. Consumers with better records can obtain better interest rates on these types of loans. Consumers with poor credit histories and scores are often denied for these types of loans, but they can often reapply and be approved by offering some type of collateral, effectively making the loan secured debt.

Because there is no asset for a bank or lender to repossess if the consumer does not make his or her payments on time, the amount of credit extended as unsecured debt tends to be lower than the amounts extended by secured debt.