Secured debt refers to sources of debt that are backed by collateral that the lender can repossess or foreclose on to regain the credit extended to the individual or business in the event the borrower defaults on payments. Examples of secured debt include mortgages, car loans, certain lines of credit, and certain bank loans. Since secured debt is backed by collateral, the lender may offer lower interest rates when compared to similar forms of unsecured debt. With secured debt, the borrower is at the disadvantage of losing the secured collateral in the event of non-payment and all or a portion of the debt may still be owed in the event of bankruptcy if the reclaimed collateral does not satisfy the debt.
Unsecured debt is not backed by collateral and instead is issued based on the borrower’s creditworthiness, such as their credit score and credit history. Since there is no backed asset to reclaim in the event of non-payment of the credit, unsecured investments may be riskier for the lender. For this reason, unsecured debt generally has higher interest rates when compared to secured debt. Examples of unsecured debt include credit card debt, student loans, and payday loans. One advantage of unsecured debt for borrowers is that in the event of bankruptcy, unsecured debt is generally eliminated, placing the lender at the disadvantage of losing out on repayment of their credit.
Disclaimer: The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.
About the Author:
Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.