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.

Details are important, especially if you’re researching loans or trying to manage debt. Learn more about how secured and unsecured debt differ, including how lenders view them to set rates and terms.

What you’ll learn:

• 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 missing payments can still have consequences.

• Examples of unsecured debt include student loans, personal loans and many rewards credit cards.

When debt is secured, lenders require borrowers to put up an asset to guarantee the debt. That collateral could take the form of property or cash assets.

If a secured debt defaults, the lender can take the collateral. That’s why secured debts are generally viewed as having a lower risk for lenders than unsecured debts. 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 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 might 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 being purchased—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, too. 

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

When a debt is unsecured, there’s no collateral associated with it. Because unsecured debts aren’t backed by collateral, lenders may view them as riskier than secured debts. That means approval qualifications 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 versus a secured loan. 

But unsecured loans could offer borrowers some advantages. Take unsecured credit cards, for example. Lenders don’t require a security deposit for these types of cards. Credit limits may be also 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 unsecured debt. Every situation is different, but getting behind on payments could cause late fees or extra interest charges. 

If a borrower misses payments or defaults on an unsecured loan, it could stay on their credit reports for up to seven years. And 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 don’t. 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 important to consider how your credit scores and credit history could affect your loan options.

Though credit may play a larger role in lending decisions for unsecured loans, it’s still a factor for both loan types. And 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) talks about two methods for paying off secured and unsecured debts:

The debt snowball method involves paying off your smallest debt first. 

To use this debt repayment method, make a list of all your secured and unsecured debts, and order them from lowest to highest based on how much you owe. Then, make the minimum payment on all debt. But put any leftover money in your budget toward the smallest debt. 

Once that debt is settled, apply the snowball method to the next smallest debt and so on.

The CFPB refers to the debt avalanche method as the highest interest rate method. As the name implies, this strategy involves targeting high-interest debt first. 

To use this method, first make a list of all your debts. Then, put them in order from highest to lowest interest rate. Be sure to pay the minimum on all debts. But put any remaining money 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 any interest rates. Things like transfer fees might make consolidation more costly.

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

If you’re still learning, these answers to frequently asked questions about secured versus unsecured debt might help

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 if you’re pre-approved for some cards without hurting your credit scores.