Secured debt vs. unsecured debt: what you should know

When we talk about debt, it is often in a fairly general way. People are buried in “debt” or struggling to repay “debt.” However, debt is not just one thing. There are typically many sources of financial strain that are contributing to overall debt and in order to find some financial relief, it is important to understand the differences between types of debt.

Broadly speaking, there are two different types of debt: secured and unsecured. Knowing what distinguishes one from the other can help you make some important decisions on how you want to move forward to resolve your financial difficulties.

Secured debts are those that were secured with collateral. Consumers can generally qualify for loans that require collateral a little more easily than other loans because the lender has something to hold on to in case a consumer is unable to pay back the loan. This includes car loans, mortgages and any other arrangement where the lender places a lien on an item.

Unsecured debts are riskier for lenders because there is no collateral exchanged. Because of this, the loans typically come with much higher interest rates to reflect the risk. In these situations, there is nothing a lender can take back if a person is delinquent in repaying the debt. Credit card and medical debts are two common examples of unsecured debts.

It is important to understand the difference between these two types of debt because it will affect what happens if end up falling behind on payments. If you cannot repay a secured loan, you could lose the item you put up as collateral, including your home. If you do not repay an unsecured loan, you could wind up facing enormous financial — and in some cases, legal — penalties.

However, there are ways to protect your assets and limit the financial repercussions of unpaid debt. Filing for bankruptcy can stop any efforts to take your home and allow you the opportunity to explore options for repaying or re-prioritizing debt.

It can be crucial to discuss the specific types of debt you have with a lawyer, as no two situations are the same. With legal guidance and support, you can make a decision that is best for you.