Secured debt is money borrowed that is guaranteed (or secured) by the borrower’s funds or assets and held by the lender in an interest-bearing account. Distinguished from unsecured debt.
Secured Loans Explained
Since secured debt is a loan that is guaranteed by collateral, the lender can offer better rates than an unsecured debt.
Collateral is an asset used to secure a loan; it is something that the lender can take if the borrower defaults. The most typical assets used as collateral are homes and cars. Therefore mortgages and car loans are considered secured debt. With a mortgage, home equity loan, home equity line of credit, or mortgage refinancing, the home is used to secure the debt. If the borrower defaults on the loan, the lender takes possession of the home through foreclosure. When buying a car with a loan, the car is used to secure the loan against default. Certain secured credit cards use money that is deposited by the borrower in the bank as collateral.
The fact that here is no collateral to guarantee the loan makes an unsecured loan more risky for the lender, because there is less consequence if the borrower defaults. For example, personal loans and debt consolidation products carry a greater risk to lenders, where-as a borrower can lose his/her home if a mortgage is not repaid, or the car can be taken if a car loan is not repaid. Mortgages and auto loans are thus examples of secured debt. Secured debts are considered a better risk for the lender; therefore, the lender can afford to offer the borrower a lower interest rate.
Although secured debt generally has a much lower interest rate than unsecured debt because it minimizes the lender’s risk, the risk to the borrower is greater since there is potential to lose the collateral.