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  • Writer's pictureSubhan Tariq, Esq

Secured vs. Unsecured Debt

Unsecured debt is a type of loan or credit where the borrower does not have to make any collateral. Collateral is something of value, such as a house, car, or other property, that the borrower puts up as a guarantee that they will repay the loan. This means that if the borrower in which makes the payments, the lender does not have the right to take any specific property or assets to repay the debt. Examples of unsecured debt include credit card debt, medical bills, and personal loans. Lenders issue funds in an unsecured loan based solely on the borrower's creditworthiness and promise to repay. Therefore, banks typically charge a higher interest rate on these so-called signature loans.

On the other hand, secured debt is a type of loan or credit that is backed by collateral. If the borrower is unable to make the payments, the lender has the right to seize the collateral and sell it to repay the debt. Examples of secured debt include mortgages, car loans, and home equity loans. Lenders often require the asset to be maintained or insured under certain specifications to maintain its value. For example, a home mortgage lender often requires the borrower to take out homeowner's insurance. The policy secures the asset's worth for the lender by protecting the property. For the same reason, a lender who issues an auto loan requires insurance coverage so that if the vehicle is involved in a crash, the bank can still recover most, if not all, of the outstanding loan balance.

However, there are some similarities between the two loans, such as, are types of loans or credit that borrowers can take out. They both have to be repaid over time with interest, and both can impact the borrower's credit score and can have consequences such as penalties and fees for late payments or defaults. Both types of debts are subject to the terms and conditions of the lender, including the interest rate and repayment schedule.

Also, the difference is mostly in terms of the interest rate; usually, the interest rate of a secured debt is lower than unsecured debt, as the lender has a guarantee in the form of collateral, as well as less rigorous credit score and debt-to-income requirements.

To learn more about what kind of debt you may be dealing with, contact us at, or submit a case review request.



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