What Is Secured vs. Unsecured Debt?

The main difference between secured and unsecured debt is collateral. Secured debt is backed by an asset that the lender may be able to take if you stop making payments.

Unsecured debt does not require collateral, but lenders may charge higher interest rates because they are taking on more risk.

KOHO Credit Builder

KOHO Credit Builder helps Canadians establish or improve their credit history through consistent monthly payments, without relying on a traditional credit card.

With KOHO Credit Builder, you can:

• See an average credit score increase of 74 points*
• Get approved without a hard credit check or minimum deposit
• Pay no interest on the line of credit
• Track your credit score and credit report directly in the KOHO app
• Build credit history through monthly payments reported to the credit bureaus

What Is Secured Debt?

Secured debt is borrowing that is backed by an asset.

The asset acts as collateral for the lender.

If you stop making payments and default on the debt, the lender may have the right to take or sell the asset to recover what you owe.

Common examples of secured debt include:

• Mortgages
• Auto loans
• Home equity lines of credit
• Secured personal loans
• Certain secured lines of credit

The specific rights available to a lender depend on the loan agreement and applicable laws.

What Is Unsecured Debt?

Unsecured debt does not require you to pledge an asset as collateral.

Instead, lenders typically decide whether to approve you based on factors such as your:

• Credit score
• Income
• Existing debt
• Payment history
• Overall ability to repay

Common examples include:

• Credit cards
• Unsecured personal loans
• Unsecured lines of credit
• Certain student loans

Because the lender does not have collateral securing the debt, unsecured borrowing may come with higher interest rates.

Secured vs. Unsecured Debt: What's the Difference?

Collateral

Secured debt requires an asset to back the loan.

Unsecured debt does not.

This is the most important difference between the two.

Interest rates

Secured loans may offer lower interest rates because the lender has an asset it can potentially recover if you default.

Unsecured debt can be more expensive because the lender is taking on greater risk.

Your actual rate still depends on the lender and your financial profile.

Borrowing limits

Secured borrowing may allow you to access larger amounts because the value of the collateral helps support the loan.

Mortgages are a good example.

Unsecured borrowing limits are generally based more heavily on your income, credit history and existing debt.

Risk to your property

With secured debt, the asset used as collateral may be at risk if you cannot repay the loan.

For example, repeatedly missing mortgage payments could eventually put your home at risk.

Unsecured lenders generally cannot simply take a specific asset because you miss a payment.

However, unpaid unsecured debt can still lead to collections, damaged credit and legal action.

Is a Credit Card Secured or Unsecured Debt?

Most traditional credit cards are unsecured.

You receive a credit limit without providing an asset as collateral.

However, secured credit cards work differently.

With a secured card, you provide a security deposit that usually determines or helps determine your credit limit.

The card issuer can use that deposit if you fail to repay what you owe.

Is a Mortgage Secured Debt?

Yes.

A mortgage is secured by the property you purchase.

Because the home acts as collateral, mortgage rates are generally lower than rates on many unsecured forms of borrowing.

However, failing to make mortgage payments can eventually lead to foreclosure or power-of-sale proceedings, depending on where you live.

Is a Car Loan Secured Debt?

Most auto loans are secured by the vehicle being financed.

If you stop making payments, the lender may be able to repossess the vehicle.

This is why buying a car with financing creates a different type of risk from using an unsecured personal loan.

Is a Line of Credit Secured or Unsecured?

A line of credit can be either.

An unsecured line of credit does not require collateral.

A secured line of credit is backed by an asset.

A home equity line of credit, or HELOC, is one of the most common examples of secured revolving credit.

The secured version may offer a lower rate, but your property is tied to the debt.

Which Is Easier to Qualify For?

It depends on your financial situation.

Secured debt can sometimes be easier to qualify for because the lender has collateral reducing its risk.

However, you still need to meet the lender's income, credit and affordability requirements.

Unsecured debt may require a stronger credit profile because the lender does not have an asset securing repayment.

Does Secured Debt Build Credit?

Both secured and unsecured debts can help build credit when the lender reports your account activity to a credit bureau.

What matters most is how you manage the account.

Making payments on time can contribute to positive credit history.

Missing payments can damage your credit regardless of whether the debt is secured or unsecured.

What Happens if You Don't Pay Secured Debt?

Missing payments can lead to:

• Late fees
• Credit score damage
• Collection activity
• Default
• Loss of the asset securing the loan

The consequences can be particularly serious when the collateral is something essential, such as your home or vehicle.

Contact your lender as soon as possible if you think you will have trouble making payments.

What Happens if You Don't Pay Unsecured Debt?

Unsecured debt does not give the lender an automatic right to take a specific asset.

However, ignoring the debt can still have serious consequences.

The lender may:

• Charge additional interest or fees
• Report missed payments to the credit bureaus
• Send the debt to collections
• Take legal action to recover the money

Unsecured does not mean there are no consequences for failing to repay.

Is Secured or Unsecured Debt Better?

Neither type is automatically better.

Secured debt may provide lower interest rates and larger borrowing amounts, but it puts an asset at risk.

Unsecured debt avoids using your property as collateral, but it may come with higher borrowing costs.

Before borrowing, compare:

• Interest rate
• Fees
• Repayment term
• Monthly payment
• Total borrowing cost
• What happens if you cannot repay
• Whether an asset is securing the debt

The right choice depends on what you are borrowing for and how much financial risk you are comfortable taking.

² Based on users with a starting score of 450 or under and who used all of our credit building tools (i.e. Credit Building, Secured Credit Building) for 12+ months with on time payments. Credit building tools we offer are not a credit repair tool and does not guarantee an improvement in credit score. Credit scores are based on complex models involving a variety of factors. Consistent on-time payments help improve scores and missed or late payments may cause credit scores to decrease. Outcomes may vary among users.