Secured Debt: Explanation and Examples

Secured Debt Basics

Secured debt is a big part of the total consumer debt in the U.S. For lenders, it’s among the top money-lending opportunities with less risk, while for borrowers, it’s a viable low-cost borrowing option.

Like any form of borrowing, secured debt—such as car loans and mortgages—comes with risks. Since secured debt is backed by collateral, it remains a preferred choice for creditors and borrowers. Learn more about different types of secured debts and what to consider before borrowing.

What Is Secured Debt?

Secured debt is a type of debt that's backed by collateral. In other words, the borrower pledges ownership in one or more specific assets (such as a home or a car) to the lender as a form of security in case they fail to repay the debt. Once you repay the loan in full, you gain full ownership of your collateral. 

If the borrower defaults on the loan, the lender has the right to seize and sell the collateral to recover the outstanding debt. The lender is generally entitled to the proceeds of the sale up to the amount owed, with any excess amount returned to the borrower.

Conversely, unsecured debt is a debt not backed by collateral that poses more risk to the lender's capital. Some common examples of unsecured debt are credit cards, personal loans, and student loans.  

Examples of Secured Debt

Here are some popular forms of secured debt:

Mortgage Loans

Mortgage loans are the most common type of secured debt and continue as the leading source of debt for Americans (PDF). Mortgages are installment loans with a repayment period of 15 to 30 years. Consumers can choose fixed or variable interest rates when securing a mortgage.

For example, in a mortgage loan, consumers enter into a contract to purchase a property using the home as collateral against their debt. By doing this, consumers authorize the creditor to legally seize (and sell) their property if they fail to repay the loan as agreed. This is referred to as foreclosure.  

Banks generally start the foreclosure process after you fail to pay four consecutive installments of your mortgage. Homeowners also have the option of a short sale if they’re unable to make payments.

Vehicle Loans

These loans are secured by the vehicle (car, boat, truck, etc.) that consumers purchase through the loan. Auto loans typically have a repayment period ranging from 24 to 72 months.

Interest rates on a vehicle loan depend on a consumer's credit score, recent credit history, age of the vehicle, and dealership requirements. Some auto dealers require buyers to put money down to secure a lower interest rate. 

Life Insurance Loans

A life insurance loan is secured against a life insurance policy, using its cash value as collateral. You can repay the debt over a specified term via monthly installments. However, if you don’t pay back the loan during your lifetime, it will be deducted from the death benefit your beneficiaries would receive when you pass away.  

What Happens if a Secured Debt Isn't Paid?

Since a secured debt is backed by collateral, the creditor can seize and sell an asset to recover the outstanding balance of the debt when you default. This process is called a lien.

Failure to pay any debt issued by a lender who regularly reports your loan information to your credit reports will also damage your credit scores with any one or all of the major credit reporting bureaus.

Understanding Liens

A lien is a legal obligation placed on the asset(s) of the debtor on behalf of the creditor. Liens can be voluntary or involuntary. In a voluntary lien, the debtor offers his asset, at the initiation of the loan, as collateral against his debt to the lender. 

In comparison, an involuntary lien is placed on the debtor's assets by an outside authority (such as a court order) to collect on an unpaid debt, no matter whether it was secured or unsecured when it was issued.

Seizure of collateral is easy for the creditor in the case of a voluntary lien because the process is spelled out in the secured loan’s terms. For example, if you fail to make a mortgage loan payment, your lender will place a lien on the house. 

In an involuntary lien on the collateral, the creditor must obtain a court order to seize the assets if the loan is left unpaid for a long enough period.

Advantages of Secured Debt

Here are a few advantages of secured debt:

Higher Loan Amounts and Longer Payback Periods

Secured debts can be used to borrow large sums of money from creditors because of the collateral involved. Since there is a guarantee of repayment backed primarily by a physical asset, the amount of debt you can borrow depends on the value of your assets.

Secured loans also come with longer repayment periods, sometimes as long as 30 years, making monthly payments much more affordable for large purchases.

Lower Interest Rates

Since these debts are protected by collateral and represent a lower risk to the lender, the interest rates are lower compared to unsecured loans. Even when borrowing a secured loan with bad credit, the interest rates you may qualify for are lower compared to personal loans for bad credit, which can be as high as 36%.

Higher Chances of Qualifying

Qualifying for a secured loan is easier compared to an unsecured loan because the lender has security. If you have bad credit, these loans are more accessible because lenders are typically willing to work with consumers who carry lower credit scores. 

Improved Credit

Taking on a secured debt and paying the installments on time keeps your credit score healthy. As your credit score improves, it'll be easier to qualify for loans at competitive interest rates.

Disadvantages of Secured Debt

Here are some cons of taking on a secured debt:

Loss of Collateral

If you fail to repay the debt, you risk losing ownership of your assets pledged as collateral. This can also leave you with a damaged credit score and finances, especially if you lose a large and valuable asset like a home.

Paying More Interest 

You can pay significantly more in interest over the course of a secured loan due to longer repayment terms. While your monthly payments are often more affordable, you’ll usually pay more in total interest, even if the interest rate is lower.

This happens because you're paying interest on the loan for a significantly longer period (30 years for a mortgage loan vs. only three to five years for an unsecured loan). However, if you pay off the secured loan early, you'll overcome this disadvantage.

Longer Approval Process 

Creditors can take as much as 60 days for the application process of a secured debt. This is due to the time-consuming verification of collateral. If you’re in need of funds for an emergency, you may want to consider an unsecured loan option, like a same-day loan. 

Choosing Between Secured vs. Unsecured Debt

Secured and unsecured debts both have their benefits, but choosing the right option depends on your financial situation, creditworthiness, and purpose for borrowing. 

A secured loan is a better option when you want to borrow a larger amount, for example, to purchase a home or a car. It may also be a sound choice if you have poor credit and are unable to qualify for unsecured loans, which are based solely on your credit and income level. Before you borrow, check your budget to ensure you can afford the payments, both now and in the future. 

Here are some of the main benefits and drawbacks of secured debt to help you choose:

An unsecured loan, such as a personal loan, can be a better choice if you don’t have collateral. It may also be effective if you have good or excellent credit and qualify for lower interest rates. Unsecured loans are typically used for smaller purchases.  

Let TurboDebt® Help with Unsecured Debt

If you're struggling to pay secured debts, let a trusted debt relief partner like TurboDebt® help you overcome unsecured debts like credit cards and personal loans. 

Our team can help you find the right debt relief solution so you can focus on paying secured debts like your mortgage or auto loan. With over 20,000 positive reviews across Trustpilot and Google, we've assisted thousands of consumers, providing excellent service and an affordable way to pay off big debt balances. 

Contact the experts at TurboDebt today to start your free consultation!