A Family-Owned, Family-Focused Bankruptcy Firm

What is the difference between secured and unsecured debt?

On Behalf of | Jun 3, 2020 | Firm News

Bankruptcy is a learning opportunity for nearly everyone who files. Some of the information will be new, while other perspectives will simply elaborate or contextualize what you already know.

One example is secured versus unsecured debt. Here is how the two are different from a legal perspective.

Types of debt

Secured debt has collateral, and unsecured debt does not. Collateral is something of value that the lender might take possession of if you do not pay what you owe.

As explained by the National Credit Union Administration, the difference between unsecured and secured debt is simply the first of many subcategories. In fact, even two loans from the same lender for a similar piece of property — the same type of car, for example — could be different based on various factors.

Sub-types of debt

There are many financial liabilities that fall within the general categories of secured or unsecured debt. Each has unique characteristics.

In terms of secured debt, you might have a mortgage, car payments or financed consumer goods. The collateral in these situations is often the thing you purchased. Your contracts probably include language about the lenders’ or vendors’ right to take back the property should you stop paying. A pawn is an example of a secured loan in which you give up possession of the collateral when you borrow and reclaim possession upon repayment.

In terms of unsecured debt, the most familiar example would be a credit card balance. Once you pass the due date for a credit card purchase, the overdue amount accrues interest quickly. In this case, the credit card company would not necessarily have any collateral to repossess. Other examples might be student loans, certain personal loans or many types of bills.

As for the best way to deal with debt, it is often best not to make too many generalizations when tackling your financial goals. Looking at each loan specifically, right down to the contract, is probably the best way to form a viable repayment strategy.