What Is Secured Debt?

Debt can creep up on you when you're living your life. You get sick, which leaves you with medical bills. Or you turn to credit cards to cover expenses when prices go up but your paycheck doesn't.

Does this sound familiar? When you have debt, you need real solutions to deal with it. Part of moving forward means knowing whether your debt is secured or unsecured. 

We've covered what it means to have unsecured debt before. Now, let's look at secured debt, how it works, and how you can manage it.

What Is Secured Debt?

Secured debt is debt that's attached to collateral. Collateral is something of value that you own, like a home. It's essentially an insurance policy for the lender. If you don't pay back the debt, the lender gets to keep your collateral.

Here's a real-life example of secured debt to help you understand how it works.

• You need to buy a new car, so you apply for a loan through your bank.

• The bank approves the loan, using the car you're buying as collateral.

• While you make payments on the loan, the bank holds the title to the car.

• Once you pay the loan in full, the car is legally yours. 

What if you don't pay the loan? The bank can take the car back and auction it to recoup its loss. 

Unsecured debts, like unsecured credit cards or personal loans, don't have any collateral attached to them. You could, however, still be sued for these debts. That's a situation where you may need to seek out relief from credit card debt. 

Understanding that matters in a financial hardship, since letting secured vs. unsecured debts go unpaid can affect you differently. You'll need to decide which debt to pay first if you can't cover everything. 

Common Types of Secured Debt

Secured debts can have different types of collateral. Here's an overview of some of the most common kinds of secured debt someone could have. 

• Mortgages. Unless you have a big chunk of cash sitting around, you probably need a mortgage to buy a home, whether you plan to live in it yourself or use it as a rental property. The home itself secures your mortgage loan. 

• Home equity loan/line of credit (HELOC). Equity is the difference between what you owe on your home and what it's worth. A home equity loan or HELOC lets you tap into that equity, using your home as collateral.

• Vehicle loans. Car loans are similar to mortgages, since the vehicle you buy secures the loan. The same goes for RV loans, boat loans, airplane loans, motorcycle loans, or ATV loans. 

• Secured credit cards. Secured credit cards can help you establish or build credit. To open one, you usually need to give the credit card company a cash deposit. The deposit is your collateral, and it can also double as your credit line. You might be able to get the deposit back if the credit card company agrees to convert you to an unsecured account. 

It's possible to turn unsecured debt into secured debt. 

Say, for example, that you owe $50,000 on five credit cards, all of which are unsecured. You get a $50,000 home equity loan to pay off the debt. Since your home is the collateral for the loan, you've swapped your unsecured credit card debt for the same amount of secured debt. 

How Secured Debt Works

Secured debt works by requiring you to offer collateral and giving the lender the right to claim it if you don't repay what you borrow. Your collateral is financial security for the lender. 

Assume you want to get a HELOC. When you apply, the lender will:

• Request an appraisal. An appraisal is a professional estimate of what the property is worth. This is done to make sure the amount you want to borrow isn't more than your home's value. 

• Finalize loan terms. One of the advantages of a secured loan is that you might qualify for a lower rate. Your HELOC lender will look at the value of your property, along with your credit scores, income, and debt to decide what rate to offer you. 

• Put a lien on the property. Once your HELOC is approved, you'll sign a loan agreement. This agreement is you giving your consent to let the lender use the home as collateral. It also allows the lender to put a lien on the home. 

A lien is a legal claim that goes on the public record, letting people know that the lender has a right to the home. You can't sell your home without paying the lien off first. 

What Happens If You Can't Pay Secured Debt

It can feel scary when you're not able to keep up with debt payments or other bills. The best way to get through it is to acknowledge that fear, then look for practical ways to deal with your situation. 

The worst-case scenario is that you lose your collateral, and you still have debt to repay. For example, if you don't pay your mortgage, your lender could start foreclosure proceedings against you. With a car loan, the lender could repossess your vehicle. 

In either case, the lender can sell your collateral at auction to pay off the debt you owe. If the auction doesn't raise enough money to cover the debt, you could end up with what's called a deficiency balance. That means you still owe something toward the loan. 

It can take months to get to this point, but that time can go by quickly if you have a severe financial hardship. So now what do you do?

Debt settlement could be an option. Settlement means your creditor agrees to accept less than what you owe toward a debt, and forgives the rest. You can't settle secured debts, since the lender can take your collateral. But you might be able to negotiate a settlement for any deficiency balances you owe, since that debt is technically unsecured. 

Talking to a debt specialist can help you figure out if this is an option for your situation. And even if it's not, a debt expert could still tell you about other possible solutions, like bankruptcy. At a minimum, just talking to someone about your situation can help to relieve the financial stress it's causing. 

Secured vs. Unsecured Debt: Key Differences

Secured and unsecured debt differ in several important ways. Here's a brief side-by-side comparison to help you figure out which kinds of debt you owe. 

Options When Struggling With Secured Debt

If your secured debt is more than you can handle because of a financial hardship, one option is debt relief. You just need to find a workable solution. 

Here are some actionable steps you can take to turn your situation around: 

1. Talk to your lenders. A little communication can go a long way when you're struggling financially. Let your lenders know that you're having a tough time keeping up with debt payments and ask if a hardship program is available. 

2. Figure out what's realistic. The type of secured debt you have can influence what you do next. For example, if you're in danger of falling behind on your mortgage, you might ask your lender about a loan modification. Modification can make it easier to manage your payments. You should know, however, that it can be difficult to qualify. 

3. Consider a refinance. Loan refinancing replaces your original debt with a new loan. Refinancing could lower your interest rate, monthly payments or both, all of which could ease some financial stress. You might refinance if you haven't fallen behind on debt payments yet and you have good credit. 

4. Talk to a bankruptcy attorney. Bankruptcy has an unwarranted bad reputation, but in some cases, it's the best way to get out of a stressful debt situation. If you're behind on a secured debt, like a home loan or car loan, Chapter 13 bankruptcy can help you get caught up on payments and keep your collateral. Look for a reputable bankruptcy attorney in your area that offers free consultations. 

Secured debt won't go away on its own, and taking even one small step to deal with it can make you feel more in control. Trust that you have the power to make a change in your situation, and your debt doesn't define you. And don't be afraid to seek out a  professional debt settlement company if you need help.