The Difference Between Secured and Unsecured Debt

Secured and unsecured debts are two types of loans. If you are considering taking on debt, it's important to know the difference between secured and unsecured debt so that you can make decision about what is right for you and your current situation.

Defining Secured and Unsecured Debt

The difference between an unsecured debt and a secured debt is that a secured debt is tied to specific asset. A common example of a secured debt is a mortgage or home equity loan. The loan is tied to the house and the bank that is loaning the money knows the worth of the house when they make the loan. Unsecured debt is money that is loaned without being tied to anything of value. A credit card is an example of this type of loan.

Ease of Obtaining Loans

Secured debts are typically easier to obtain than unsecured loans. The difference between secured and unsecured debt for the purposes of approval is that with a secured debt, the lender knows that if you fail to repay that they can seize your asset. With an unsecured loan, the lender will want a greater level of confidence in your ability to repay. This usually means that a higher credit score will be required.

Terms of the Debt

For the same reason that unsecured debts are riskier for lenders, the interest rates will also often be higher. A secured debt is lower risk so the bank can afford to charge lower interest rates. The terms of any loan will be highly variable though and there are many other factors that go into determining the cost of the debt.

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Risks of Defaulting

The biggest difference to consider between secured and unsecured debt is what happens if you fail to repay. With any debt, there are consequences for not repaying the loan according to its terms. For an unsecured loan, the consequences may include fees, debt collection procedures, damage to your credit score, and legal action or bankruptcy. For a secured debt, expect to loose the asset that the debt is tied to in addition to the consequences of an unsecured loan.

Information is the basis of smart credit decisions. Before taking on a new loan, be sure that you understand whether it is secured or unsecured and what the differences are for you. Be sure to consider your personal situation and what will work best for you.