When consumers buy on credit, there are two main types of debt that they can incur: secured and unsecured. The difference is fairly simple, yet they can be treated very differently in many ways. In basic terms, a secured debt has collateral that can be taken if the debt is not repaid. Unsecured debt is not attached to any tangible collateral, only the promise of repayment by the debtor. Because of this main difference, these two types of debt usually have different interest rates and consequences when they are not repaid.
Secured Debt
Most secured debt is for large purchases or investments. In these cases the loan is borrowed to buy a large purchase, such as a house, vehicle or boat. Because the loan is secured, interest rates are generally lower than unsecured credit. The item purchased is put as collateral with the stipulation that if the loan is not paid as agreed, the lending institution has the right to repossess the item. Another way secured debt is incurred is for cash loans. A person may use an item such as a home or vehicle as collateral to receive monies for personal reasons. Whatever is used as collateral is then subject to possible repossession if the loan is not repaid or if the person files bankruptcy.
Unsecured Debt
The most common types of unsecured debts are credit cards or signature loans. In both cases, credit is given based on the promise of the debtor to repay. While not repaying the debt will negatively affect the persons credit worthiness and score, usually the lender has no alternatives beyond reporting the unpaid debt to credit agencies. Due to this, unsecured credit and loans are generally at higher interest rates since they are a higher risk for the lenders. If the person files bankruptcy or does not pay, the debt is usually a complete loss for the lender.