Unsecured debt explained

November 20, 2011 

Dear Dave,

What is unsecured debt?

- Anonymous

Dear Anonymous,

This is a great question. You'd be surprised how many people don't know the difference between "secured" debt and "unsecured" debt.

Unsecured debt means that someone loaned you money, but they don't have a lien on anything. Credit cards and student loans are good examples of unsecured debt, because there's nothing they can directly repossess if the borrower doesn't pay. Now, if you don't pay, they can sue you and get a lien against something after they sue you. Lots of times this is done against your income by garnishing your wages.

Examples of secured debt would be a car loan or even a home mortgage. A home mortgage is secured by the home, meaning they take a lien against the home. If you don't pay, they can foreclose and take the house. It works the same way with a car loan. If you don't make your payments, they can come get the car.

Remember this, too. Unsecured debt typically will be the last debt you pay if you're in financial trouble. In other words, you'd make your car payment before paying on your student loan, and you'd make your house payment before paying on a credit card.

In a worst case scenario, like bankruptcy, unsecured debt is wiped off. The creditor gets nothing. But a car loan or house payment either gets made, or you give up your car or home. It's easy to see how a lender making a secured loan is in a much better position than one making an unsecured loan, isn't it?

- Dave

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