Unsecured Debt vs Secured Debt – What’s the Difference?

Written By Aaron Sarentino
Mar 9, 2022
Facebook Share Icon LinkedIn Share Icon

There are generally two categories of debt: secured and unsecured. The primary difference between unsecured debt and secured debt is collateral. Secured debts are backed by collateral, while unsecured debts are not backed by collateral. 

What is Unsecured Debt?

Unsecured debt is the result of the extension of credit that is not backed by collateral. Lending your friend cash for a drink is an example of unsecured debt because the repayment of that loan is based solely on your friend’s promise and trustworthiness.

Likewise, the outstanding balance on a credit card is unsecured debt. When a credit card company issues you a credit card, they typically do not require collateral. Instead, they consider your creditworthiness by looking at your credit score, and they charge an interest rate to justify the risk. 

When a borrower defaults on unsecured debt, there is no asset for the lender to acquire as repayment. Therefore, the lender must sue to collect payment. Borrowers might be able to avoid repayment altogether if they declare bankruptcy, but this will destroy their credit score and make it very difficult to secure credit in the future.

Obtaining an unsecured loan from a bank typically requires an outstanding credit score and a competitive debt-to-income ratio. Unsecured bank loans often come with relatively high interest rates and are given to only the most creditworthy borrowers. 

What is Secured Debt?

Secured debt is the result of an extension of credit that is backed by collateral. The borrower must put up an asset as surety for credit. Lending your friend cash for a drink on the condition that you hold onto their watch until their debt is repaid is an example of secured debt. You don’t necessarily have to trust your friend because you can pawn their watch if they fail to pay you back. 

Mortgage and auto loans are common forms of secured debt. The collateral for these loans is the very asset that is being financed—the home or car. When a borrower fails to pay, the loan issuer will eventually seize the asset and sell it to compensate for the unpaid loan. 

Secured debt financing typically comes with lower interest rates and is easier to obtain because the risk of default, called the counterparty risk, is relatively low since the borrower stands to lose an asset if their debt goes unpaid. 

Since the security of secured loans is based on an asset, the loan issuer has an interest in the borrower maintaining the value of that asset. For this reason, lenders will often require that borrowers take out insurance on a house or car so that the collateral won’t become worthless in the event of an accident. 

Prioritizing Debt Repayment

Two approaches are often recommended for prioritizing debt repayment. One, called the avalanche method, involves paying off debts with the highest interest rates first (typically unsecured debt). The other, called the snowball method, emphasizes quickly paying off the smallest debts first to create momentum. 

However, you need a roof over your head and a vehicle to get to work, so paying your secured debts may take precedence over high interest credit card debt.

You can find help managing your secured and unsecured debts through consumer credit and debt relief solutions offered by companies like Americor. Contact a certified debt consultant today to receive a free debt analysis. 

Click here to apply: https://apply.americor.com/new


See how Americor can help

Check Your Options

About Americor

Americor provides debt solutions to thousands individuals and families all over the country. We’re a next-generation debt relief company with a proprietary platform designed to help clients get out of debt quickly. Together we’ll develop a strategy for you to enjoy a debt free lifestyle. Learn more about how Americor can help relieve the burdens of debt today.

18200 Von Karman Ave, 6th Floor Irvine, CA 92612
New Clients:
[email protected]
Existing clients:
[email protected]

We provide debt resolution services. Our clients who make all monthly program payments save approximately 40 – 50% of their enrolled debt (average of 43%) upon successful program completion, before program fees. Fees are based on a percentage of your enrolled debt at the time of starting the program and range from 15%-25% of your enrolled debt. Programs range from 20-48 months. Clients must save at least 25% of each debt due to an enrolled creditor before a bona fide settlement offer will be made. On average, clients receive their first settlement within 4-7 months of enrollment and approximately every 3-6 months thereafter from when the prior debt was settled. Not all Clients complete the program. Estimates are based on prior results and may not match your results. We cannot guarantee that your debts will be resolved for a specific amount or percentage or within a specific timeframe. We do not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting, legal advice or credit repair services. Our program is not available in all states; fees may vary by state. Some programs may be offered through The Law Firm of Higbee & Associates d/b/a Advantage Law. The use of debt resolution services will likely adversely affect your credit. You may be subject to collections or lawsuits by creditors or collectors. Your outstanding debt may increase from the accrual of fees and interest. Any amount of debt forgiven by your creditors may be subject to income tax. Clients may withdraw from the program at any time without penalty and receive all funds from their dedicated account, other than funds earned by the company or fees paid to third-party service providers, as may be applicable. Read and understand all program materials prior to enrolling. Certain types of debts are not eligible for enrollment. Some creditors are not eligible for enrollment because they do not negotiate with debt relief companies. To determine the offers you may be eligible for, Americor conducts a “soft credit pull.” This credit pull does not impact your credit score, creditworthiness, or ability to obtain credit from other sources. The soft pull is not a tradeline entry, it does not report against your score and will only take a few minutes.

Americor Funding, LLC (18200 Von Karman Ave, 6th Floor Irvine, CA 92612) is fully accredited by the Better Business Bureau (BBB), the American Fair Credit Council (AFCC), and the International Association of Professional Debt Arbitrators (IAPDA). CA Department of Financial Protection and Innovation (DFPI) License # 603K913.

Copyright © 2022 Americor Funding, LLC dba Americor Financial. All rights reserved