Secured debt vs. unsecured debt: What’s the difference?
The key difference between secured debt and unsecured debt is collateral. Collateral is an asset, such as a car, house or cash deposit, from the borrower that backs up the debt. Secured debts require collateral; unsecured debts don’t.
Each type of debt comes with benefits and disadvantages related to qualifying requirements and borrowing costs.
What you’ll learn:
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Secured debt is backed by collateral. If a borrower defaults on a secured loan, the lender could repossess the collateral.
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Examples of secured debt include mortgages, auto loans and secured credit cards.
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Unsecured debt doesn’t require collateral. But missing payments can still have consequences, like late fees or a negative impact on credit scores.
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Examples of unsecured debt include student loans, personal loans and many rewards credit cards.
What is secured debt?
Secured debt is backed by an asset that guarantees the debt—also known as collateral. That collateral could take the form of property or cash assets.
Secured debts tend to have lower risks for lenders than unsecured debts. That’s because if a borrower defaults on a secured debt, the lender can take the collateral. As a result, secured loans may offer better interest rates and financing terms. And lenders may be less strict about qualifying criteria, like credit scores.
Secured debt examples
Here are some of the most common forms of secured debt:
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Secured credit cards: A secured credit card can be used to make purchases the same way as a traditional credit card, but it requires a security deposit to open. The security deposit acts as collateral.
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Mortgages or auto loans: With these types of loans, the item being purchased—such as a home or a car—typically serves as collateral.
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Home equity loans (HELs) or home equity lines of credit (HELOCs): Homeowners can tap into the equity they have in their home to secure financing—typically using the home itself as collateral.
What is unsecured debt?
Unsecured debt doesn’t require collateral to get the money. Because unsecured debts aren’t backed by collateral, lenders may view them as riskier than secured debts. That means repayment terms could be shorter and interest rates could be higher. And they usually have stricter approval qualifications because lenders rely on credit scores and credit history when extending credit in the form of an unsecured debt.
Unsecured debt examples
Here are some of the most common forms of unsecured debt:
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Personal loans
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Student loans
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Medical bills
Secured debt vs. unsecured debt
The main difference between secured and unsecured debt comes down to collateral.
You may not be able to choose between each type of financing, particularly when you’re shopping for a mortgage or car loan. But when it comes to comparing them, there are a few things to keep in mind:
| Secured debt | Unsecured debt | |
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Collateral |
Yes | No |
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Qualifications |
Might have lower credit score and debt-to-income (DTI) thresholds because collateral backs the debt | Might rely more heavily on a borrower’s creditworthiness because there’s no collateral to back the debt |
|
Interest rates |
Tend to be lower | Tend to be higher |
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Repayment periods |
Typically longer | Typically shorter |
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Risks of late payments |
Late fees or penalties for missing payments; negative information reported to the credit bureaus could affect borrowers’ credit scores | Late fees or extra interest charges; negative information reported to the credit bureaus could affect borrowers’ credit scores |
|
Risks of default |
The lender can seize the asset serving as collateral | The account could be sent to collections |
Secured debt vs. unsecured debt FAQ
If you’re still learning, these answers to frequently asked questions about secured and unsecured debt might help.
What are the main disadvantages of secured and unsecured loans?
If you’re searching for a loan, you may not get to choose between secured and unsecured debt. But it’s still helpful to understand potential disadvantages.
For secured loans:
- Using assets as collateral might mean you could lose them if you don’t repay the loan in a timely manner.
- Secured loans could be tied to the asset, which means you could have less flexibility in how the funds can be used.
For unsecured loans:
- The interest rate could depend on your credit scores, so the lower your scores, the higher the interest rate might be.
- Qualifying for one tends to come with stricter requirements, so you may find it harder to get approved.
Do secured loans hurt your credit scores?
Initially, applying for and getting approved for a secured loan could negatively impact your credit. But with responsible use by doing things like making on-time payments every month, secured debt can be beneficial to your credit.
How do secured and unsecured credit cards compare?
Here are the main differences between secured and unsecured credit cards:
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Secured credit cards require a security deposit—which serves as collateral—to open the account. They tend to have lower initial credit limits, but with responsible use, the limit could be increased.
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Unsecured credit cards don’t require a security deposit. This type of credit card may offer higher credit limits and additional benefits, such as miles or cash back. And if you’re able to pay off your balance every month, you may be able to avoid paying interest.
Key takeaways: Secured debt vs. unsecured debt
Secured loans require collateral, which can mean more favorable terms and interest rates. Unsecured loans don’t require collateral, but that could make creditworthiness a bigger factor during the application process.
Capital One offers a variety of secured and unsecured credit cards for those with fair to excellent credit scores. You can compare secured and unsecured credit cards from Capital One. You can even see whether you’re pre-approved for some cards without hurting your credit scores.
