Key takeaways
- Secured debt is tied to an asset, like a home or car, that the lender can take if you don’t pay.
- Unsecured debt, like credit cards and medical bills, isn’t tied to a specific asset.
- Most debt relief options, like debt management plans and settlement, only cover unsecured debt.
- When money is tight, missing secured payments can cost you your home or car.
- Turning unsecured debt into secured debt, for example with a home equity loan, raises the stakes.
When you’re sorting out what you owe, one of the most useful things to know is whether each debt is secured or unsecured. It affects what happens if you fall behind, which debts to protect first, and which kinds of help can apply. Here’s the difference.
Secured debt
According to the CFPB, secured debt has an asset attached to it, called collateral. If you don’t pay, the lender can take that asset.
Common examples:
- Mortgages, secured by your home. Missing payments can lead to foreclosure.
- Auto loans, secured by your car. Missing payments can lead to repossession.
- Home equity loans and lines of credit, secured by your home.
- Pawn loans and secured credit cards (secured by a deposit).
Unsecured debt
Unsecured debt isn’t tied to a specific asset. The CFPB lists examples like:
- Credit cards.
- Medical bills.
- Personal (signature) loans.
- Student loans.
If you don’t pay unsecured debt, there’s no asset for the lender to take directly. But there are still consequences: late fees, damage to your credit, collection calls and possibly a lawsuit. A court judgment can lead to wage or bank garnishment. See wage garnishment: what it is and how to respond.
Why it matters for debt relief
Most debt relief options are designed for unsecured debt:
- Debt management plans cover unsecured debts like credit cards and medical bills, not mortgages or car loans, according to the FTC.
- Debt settlement generally applies to unsecured debts.
- Balance transfers and consolidation loans are usually used for credit card debt.
For secured debts, help usually comes from the lender itself, like a mortgage or auto loan modification, or through bankruptcy. Chapter 13, for example, can help you catch up on missed mortgage payments; see Chapter 7 vs. Chapter 13 bankruptcy.
Which to pay first when you can’t pay everything
When money is short, the CFPB’s bill-priority guide suggests protecting your income and housing first. That often means keeping up with secured debts like your mortgage or rent and your car loan if you need the car for work, before unsecured debts like credit cards. Our bare-bones budget guide walks through the order.
Keep making at least minimum payments on unsecured debts if you can, and call those creditors about hardship plans before you fall behind.
Be careful turning unsecured debt into secured debt
Using a home equity loan or line of credit to pay off credit cards may lower your rate, but it changes what’s at risk. If you can’t pay credit cards, your credit suffers. If you can’t pay a home equity loan, you could lose your home. See using home equity to pay off credit cards: the risks.
The bottom line
Secured debts are tied to things you own and can cost you those things if you fall behind. Unsecured debts can’t take your property directly, but still have serious consequences. Know which is which, protect your home and car first, and match each debt with the right kind of help. A nonprofit credit counselor through the NFCC can help you sort it out.
Sources: CFPB: differentiating secured and unsecured loans · FTC: how to get out of debt · CFPB: prioritizing bills