Secured Debt and Unsecured Debt: Learn The Difference
Secured debt and unsecured debt are two different types of debt that an individual can have.
The difference between these two types of debt is important to understand because they are not treated the same.
Whether a debt is secured or unsecured makes a difference when it comes to debt management and finding the best solutions when you are struggling with debt.
Understanding if you are dealing with a secured or unsecured debt helps you to work out which options will make it easier for you to deal with it.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
What is a Secured Debt?
A secured debt is a debt that is secured against an asset.
This can include promising an asset that you own as collateral or using a loan to make a purchase, with a lien on the item that you purchase from the lender until you have repaid the loan.
Some examples of a secured debt include a mortgage or a car loan.
Both of these involve taking out a loan, which is secured against the asset that you purchase.
If you were to default on the loan, the lender could reclaim the asset in order to cover your debt.
If you decide to sell before paying off the loan, the lender must be paid in order to settle the debt.
Other examples of secured debts include homeowner and equity loans, second mortgages, and some debt consolidation loans.
When you have a secured debt, there is no option to both keep the asset and get rid of the debt without paying it off.
If you are struggling to make payments on a secured debt, it is not possible to discharge it in a consumer proposal or bankruptcy because the lender has an interest in the asset that it is secured against.
To resolve the debt, the asset would need to be sold or might be repossessed by the lender.
Secured debts are less risky for lenders, which is why the interest rates are usually lower.
If you are having problems meeting the payments for a secured debt, you don’t necessarily have to give up the asset against which it is secured.
There are options that might be useful to help you keep your home, car, or other assets.
With help from a debt expert, you may be able to make some changes to your finances that will enable you to continue making payments on your secured debt.
This may include finding ways to deal with any unsecured debt that you hold.
What Is an Unsecured Debt?
Unlike a secured debt, an unsecured debt is not secured against an asset.
Unsecured debt includes normal consumer spending, such as credit cards or lines of credit, bills for services, consolidation loans, or unsecured personal loans.
When you have these types of debt, the lender does not have the right to seize your purchases in order to cover the cost if you do not repay your debt.
Unsecured debts may often be smaller than secured debts.
They carry more risk for lenders because they cannot recover their money so easily, meaning that there is a larger chance that they might not get it back.
This means that unsecured debts often have higher interest rates, which can sometimes be a problem.
However, although individual unsecured debts may be smaller, they can easily pile up and become difficult to deal with.
Fortunately, if you are struggling to manage unsecured debts, there are various solutions that can help you to deal with the problem.
Unlike secured debts, unsecured debts can be discharged, although some solutions, such as bankruptcy, might require you to sell some of your assets.
A licensed insolvency trustee can help you to explore the available solutions for dealing with unsecured debts.
Bankruptcy is one possibility for people who are insolvent and owe more than $1,000.
It leads to the discharge of most unsecured debts.
A consumer proposal is another option that is a possibility for people struggling to pay their unsecured debts.
When you need help paying your debts, first make sure that you know whether your debts are secured or unsecured.
This will make it possible for you to start finding the best solutions to deal with your debt and seek the right advice.
For more advice about debts and debt management, take a look around the Bankruptcy Canada website.
We can help you to find a local, licensed trustee for assistance in dealing with debts, insolvency, bankruptcy, and more.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?