Secured Debt

Beginner

Secured debt is borrowing backed by an asset, called collateral, that the lender can take and sell if the borrower fails to repay.

Common examples of secured debt are mortgages, which are secured by the property, and car loans, which are secured by the vehicle. If the borrower stops paying, the lender has the legal right to repossess the asset and sell it to recover what is owed.

Because the lender has this backup, secured debt is less risky for the lender. As a result, it usually comes with lower interest rates and can allow larger amounts to be borrowed than unsecured debt. A mortgage might charge 5% while an unsecured personal loan charges 10% or more.

The risk shifts towards the borrower. If you fall behind on a secured loan, you could lose the asset, such as your home or car. If the asset is sold for less than the amount owed, you may still owe the difference.

Before taking on secured debt, it is important to be confident that repayments are affordable, even if circumstances change, because the consequences of default are more serious than for most unsecured debts.

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