Secured Debt

Key Highlights

• Secured debt is a type of loan where you use something valuable you own as a safety net for the lender.

• It makes lenders more comfortable offering you credit, often at better terms.

What is Secured Debt?

Secured debt is a type of loan where you use something valuable you own as a safety net for the lender. It makes lenders more comfortable offering you credit, often at better terms. But if you’re unable to repay, the lender has the right to take that asset to recover their money.

Key Points

• Collateral Needed: You pledge an asset (e.g., your home for a mortgage or car for an auto loan).

• Less Risky for Lenders: The collateral makes it safer for lenders, so they often charge lower interest rates than for unsecured loans.

• Better Terms: You might get a bigger loan or longer repayment period because the lender has that extra security.

• Priority in Tough Times: If you go bankrupt, secured lenders get paid from the collateral before others.

How’s it Different from Unsecured Debt?

Unlike unsecured debt (like most credit cards), secured debt requires collateral. Since there’s less risk for the lender, secured loans usually have lower interest rates, while unsecured loans depend only on your credit score and are riskier for lenders.