Secured vs. Unsecured Debt

Getting a mortgage can be a daunting task. There is so much to know and understand including some pretty confusing language. Borrowers are often confused by mortgage terminology, so in an effort to keep you educated we welcome you to the Mortgage LINGO defined courtesy of Bill Mitchell of the Mortgage Centre

Secured and Unsecured Debt

There are two types of debt: secured and unsecured.

Unsecured debt has no collateral attached meaning it requires no security, as the name implies. If a borrower defaults on this type of debt, the lender must initiate action to collect what is owed. Unsecured loans are generally based on a borrower’s creditworthiness and the promise to repay. Lenders typically charge a higher interest rate on these types of loans.

Secured debts are those in which the borrower uses collateral, along with a promise to repay in exchange for the loan. With a secured debt, in the event of default the lender can seize the asset to repay the funds it has advanced the borrower. The most common types of secured debt are mortgages and auto loans.