What is the difference between secured and unsecured debt?

The distinction between secured and unsecured debt fundamentally revolves around the presence of collateral. Secured debt is defined by the fact that it is backed by an asset or collateral, which means that if the borrower defaults on the loan, the lender has the legal right to seize the collateral to recover their losses. Examples of secured debt include mortgages and auto loans, where the property itself serves as collateral.

On the other hand, unsecured debt lacks any collateral backing. In this case, the lender has no claim to a specific asset if the borrower defaults. This type of debt is typically associated with higher risk for the lender, which can result in higher interest rates compared to secured loans. Common examples of unsecured debt include credit card debt and personal loans.

Understanding this distinction is crucial in the field of consumer debt management, as it influences the risk assessment for lenders and the recovery options available in case of default.