In speaking to a friend recently about credit cards, mortgages, and personal finance, he confided that he had very little knowledge of most things finance related. The question he eventually asked me was “What is the difference between secured and unsecured debt?” Since I feel the answer could benefit more than just my friend, I decided to post it up here for all to see.
Secured Debt is debt backed by something tangiable. Good examples of a secured debt are your vehicle and your mortgage. There is a physical good that can be reposessed or foreclosed on to recoup losses by the lender in the event you fail to make the payments.
Unsecured Debt is debt without a tangiable asset to back it. The best example of this would be a credit card. A regular credit card has nothing to back it, so the creditor can only attack your credit score and not your home.
There are secured credit cards, where you pay a specific amount up front to the creditor, for instance, $500. You are then given a credit card with a credit limit of $500, secured by the money you have already fronted to the creditor. This would be considered a secured debt.
Hope this helps!