Secured versus Unsecured Debt

Unsecured Debt

Unsecured debt refers to a type of debt that is not assured to the creditor by any collateral. Credit cards for example are typically unsecured debt, as no assets are tied to the account for the creditor to seize from the borrower in the case of non-payment. For this reason, unsecured loans are considered greater risks to the lender and consequently tend to come with higher interest rates. Medical bills, student loans, and personal loans are also unsecured debt.

Secured Debt

Secured debt refers to debt that is backed by collateral to the creditor. In the event of a default, the lender can collect on this collateral to recover some losses from the non-payment. A loan for a mortgage or a vehicle would fall into this category, as the creditor could foreclose the home or repossess the vehicle if the borrower defaults on the loan. Because this collateral exists, interest rates on secured loans tend to be lower than rates on unsecured loans.

You may wonder whether to focus on repaying unsecured or secured debts first. The best course of action will vary by situation. If you are paying down debt by dedicating more than the minimum monthly payments, it may be a good idea to pay unsecured debts first due to their higher interest rates. However, if you find that you are struggling to make any payments at all, secured loans should come first; these are harder to catch up on and often have important assets attached as collateral.