Secured and unsecured debt: the difference

Resources · Debt basics · 4 min read Building

Key points

• Secured debt is tied to an asset, such as a home or car, that the lender can claim if repayments stop.
• Unsecured debt has no asset attached. The lender relies on your promise to repay.
• Secured debt often comes with lower interest rates, because the lender takes less risk.
• Each type carries different consequences if things go wrong.

What secured debt is

A secured debt is linked to something you own. That something is called security, or collateral.

If repayments stop, the lender has a legal claim on that asset. The exact process differs between countries, but the idea doesn’t change. The asset backs the loan.

The most familiar example is a home loan or mortgage, secured against the property. A car loan is often secured against the car. Loans can also be secured against equipment or another valuable item. And a pawn loan is the most literal version: you hand over an item and get it back when you repay.

What unsecured debt is

An unsecured debt has no asset attached. The lender lends based on your income, your credit history and your promise to repay.

Credit cards and store cards are unsecured. So are most personal loans. Overdrafts and buy now, pay later plans often are too, and so are many student loans, though terms differ by country and lender.

Stop paying an unsecured debt and the lender can’t simply take a particular item. But don’t mistake that for no consequences. Missed payments are usually recorded on your credit report. Fees and interest keep building. The lender may take legal steps to recover the money. What’s possible differs from country to country.

Why the interest rates differ

Lenders price loans by risk. With secured debt, they can recover some of their money from the asset if they need to. With unsecured debt, they can’t. So unsecured debt often carries a higher rate.

That isn’t a fixed rule. Rates depend on the lender, the product, your credit history and the wider economy. Still, it explains a pattern you’ll probably spot on your own list of debts.

A worked example

Here’s how much the rate alone can change the cost of borrowing the same amount.

Assumptions for both loans: $10,000 borrowed, repaid monthly over 48 months, interest charged monthly at the APR ÷ 12 on the balance before each payment, and the last payment is whatever clears the balance.

The same maths works in any currency.

These rates are illustrative, not typical rates for any country. Look at the gap. Doubling the rate on this loan more than doubles the interest, adding $1,884.98 to the total cost.

The trade-offs

Neither type is simply better.

Secured debt often comes with a lower rate, and often larger amounts and longer terms too. But a specific asset is on the line if repayments stop. And a longer term can mean more total interest, even at a lower rate.

Unsecured debt puts no particular asset at stake, and it’s often quicker to arrange. The catch is a higher rate, usually. Easy-to-reach credit like cards can also build up without you really noticing.

Some people are wary of turning unsecured debt into secured debt, for example by borrowing against their home to clear credit cards. It can lower the rate. But it puts the home behind debts that weren’t tied to it before, and a longer term can raise the total paid. It depends on the numbers and how much risk you’re comfortable carrying.

Why secured debt matters on your debt list

When you list your debts, note whether each one is secured or unsecured. It tells you what’s at stake if a payment is missed. It shows which debts people often keep current first, such as the ones tied to their home or the car they need for work. And it lets you compare rates side by side, so you can see where most of your interest is going.

If you’re struggling to keep up with repayments on any debt, secured or not, free debt help is available, and it’s confidential.

Common questions

What is the difference between secured and unsecured debt?

Secured debt is tied to an asset, such as a home or car, that the lender can claim if repayments stop. Unsecured debt has no asset attached and relies on your promise to repay.

Is a credit card secured or unsecured debt?

Credit cards are usually unsecured. So are most personal loans, and often overdrafts and buy now, pay later plans too.

Why is secured debt often cheaper?

The lender can recover some of its money from the asset, so it takes less risk. That isn’t a fixed rule, though. Rates also depend on the lender, the product and your credit history.

Try it

Compare rates and terms on any loan with the loan repayment calculator. To see all your debts together, find your Freedom Date.

General information only, not financial advice. Your situation is your own.