Secured debt vs. unsecured debt: What’s the difference?

Details are important, especially if you’re researching loans or trying to manage debt. And one major detail to understand is whether debt is secured or unsecured. 

The main difference between the two comes down to collateral. Collateral is an asset from the borrower—like a car, a house or a cash deposit—that backs the debt. Secured debts require collateral. Unsecured debts don’t. Those are the basics. But keep reading to dig into even more of the details.

Key takeaways

• Secured debt is backed by collateral. If a borrower defaults on a secured loan, the lender could repossess the collateral.
• Examples of secured debt include mortgages, auto loans and secured credit cards.
• Unsecured debt doesn’t require collateral. But missed unsecured debt payments or defaults can still have consequences.
• Examples of unsecured debt include student loans, personal loans and traditional credit cards.

When debt is secured, the lender will typically ask you to put up an asset to guarantee the debt. That collateral could take the form of property or cash assets.

Secured debts are generally viewed as having a lower risk for lenders than unsecured debts. For example, if a secured debt goes into default, the collateral can be taken by the lender. As a result, these loans may offer better interest rates and financing terms. And lenders may be less strict about qualifying criteria, like credit scores.

Secured credit cards are one form of secured debt. Typically, they can be used to make purchases the same way traditional credit cards are used, but they require a security deposit to open. Think of it like a form of collateral, similar to a security deposit you pay a landlord before renting an apartment. 

Mortgages and auto loans are two other common situations in which you may encounter secured debt. In those cases, the item purchased with the borrowed money—the home or the car—typically serves as collateral.

Secured debts may come at a lower risk to lenders. But as a borrower, remember that collateral can be taken if the debt isn’t repaid. There may be other consequences too, like fees or penalties, for missing payments. 

And if the lender reports negative information to credit bureaus, it could affect the borrower’s credit scores. 

You can check the terms and conditions of your secured debt to learn more.

When a debt is unsecured, there’s no collateral attached to it. Because unsecured debts aren’t backed by collateral, lenders may view them as riskier than secured debts. That means qualifications to be approved could be stricter and interest rates could be higher.

Unsecured debt can take the form of things like traditional credit cards, personal loans, student loans and medical bills. Some borrowers may even use unsecured loans to consolidate their existing debts.

Unsecured debt isn’t backed by collateral, so lenders might rely more heavily on credit scores and credit history to make lending decisions. That’s one reason why it could be harder to qualify for an unsecured loan than a secured loan. 

But unsecured loans could offer borrowers some advantages. Take unsecured credit cards, for example. Lenders don’t require a security deposit. Credit limits may be higher than those of secured credit cards. And cards may come with additional perks, such as rewards miles or cash back. Plus, if you’re able to pay off your balance every month, you may be able to avoid paying interest.

If you want to explore other unsecured loan options, be sure to check with your lender to learn more about how other unsecured debt works.

Even without collateral, there are consequences for not repaying your unsecured debt. Every situation is different, but getting behind on payments could result in late fees or extra interest charges. If a borrower misses payments or defaults on an unsecured loan, this activity could stay on their credit reports for up to seven years. Also, if payments get too far behind, the account could be sent to collections.

Every financial situation is unique, and there aren’t a lot of situations where it’s up to a borrower to choose between a secured and an unsecured loan. You’re not likely to have much luck if you’re trying to find unsecured car loans or mortgages, for example.

But when it comes to comparing secured vs. unsecured debt, there are a few things to keep in mind: 

• Secured debts have collateral requirements, while unsecured debts do not. If you default on a secured loan—like a car loan or mortgage—the lender could repossess the asset. That’s why it’s important to take your repayment abilities into account.
• Because unsecured debt isn’t tied to collateral, a borrower’s credit scores could play a larger role in these lending decisions. So, it’s also important to consider how your credit scores and credit history could affect your loan options.

Credit may play a larger role in lending decisions for unsecured loans. But it’s still a factor for both types. Taking steps to improve your credit could, over time, help you qualify for lower interest rates and better loan terms.

Whether debt is secured or unsecured, having a plan to pay it off can be helpful. 

It’s important to make at least the minimum payment on all debts as part of any plan. But it could make sense to put more money toward secured debt to ensure you don’t lose collateral—especially if that collateral is a home or a car. If you’re concerned with higher interest rates, it could make sense to prioritize unsecured debts to avoid paying more in the long run.

The Consumer Financial Protection Bureau (CFPB) offers two methods you might consider for paying off secured and unsecured debts:

The debt snowball method involves paying off your smallest debt first. Make a list of all your secured and unsecured debts and order them from lowest to highest based on how much you owe. For each debt, besides the smallest, make the minimum payment. Then, put additional money in your budget toward the smallest debt. Once you settle it, apply the snowball method to the next smallest debt.

The CFPB refers to the debt avalanche method as the “highest interest rate method.” This strategy involves targeting high-interest debt first. Start by making a list of all your debts. Then, order them from highest to lowest based on interest rate. 

Pay the minimum on each debt except for the one at the top. Then, like with the snowball method, put the remaining money you’ve budgeted toward the debt with the highest interest rate. After you’re done paying it off, apply the avalanche method to the debt with the next highest rate.

Refinancing your debt or using a balance transfer to consolidate or simplify payments could be another option. But be sure to explore the full cost of transferring a balance and interest rates. Things like transfer fees might make consolidation more costly.

Talking to a financial expert before you do anything could help you make the best decision.

Whether you have secured or unsecured debt, monitoring your credit can help you see how debt is affecting your financial standing and what’s being reported to credit bureaus. CreditWise from Capital One can help. It’s free for everyone—not just Capital One customers—and using it won’t hurt your credit.

CreditWise lets you access your TransUnion® credit report and weekly VantageScore® 3.0 credit score. And you can even explore the potential impact of your financial decisions—like paying off debt or adding new lines of credit—before you make them by using the CreditWise Simulator.

You can also get free copies of your credit reports from all three major bureaus—Experian®, Equifax® and TransUnion—by visiting AnnualCreditReport.com.

If you’re shopping for a loan or line of credit, it’s helpful to understand the differences between secured and unsecured debt. Secured loans could offer lower interest rates, but they also require collateral. While unsecured loans don’t require collateral, they could have higher interest rates or fees. 

Each type of debt could have its own potential benefits, risks and lending requirements. When you compare loans, it’s a good idea to consider how financial needs, credit scores and credit history could affect your secured or unsecured debt options. 

Debt can seem complicated. But when you dig into the details and learn about repayment strategies, you may find that it’s not quite as intimidating. If you want to continue to learn more, it might be worth exploring the differences between installment loans and revolving credit next.