November 19, 2025
Understand the difference between secured and unsecured debt, with examples and tips on which type to prioritize when paying off loans.
Not all debts are the same. There are actually two main categories of debt: secured and unsecured. Each comes with different terms, risks, and responsibilities, making it important to understand the distinctions.
Secured debts are backed by an asset, something lenders can reclaim if payments aren’t made. On the other hand, unsecured debts don’t require collateral but often come with higher interest rates because of the increased risk to the lender.
We'll break down some examples of each, and why it's important to know the difference between them when it comes to debt relief.
Secured debt relies on collateral—an asset that guarantees the loan.
Two of the most common forms of secured debt are:
Lenders approve loans like mortgages or car loans with the agreement that they can seize the property or vehicle if the borrower doesn’t meet payment terms.
Essentially, if they can foreclose on it or repossess it, then it's secured debt.
This means there are significant consequences for missing payments. With these two common examples, you could lose your car in a repossession or your home to foreclosure if you fail to pay on time or in full.
That's why it's critical to stay current on payments and understand the loan’s terms fully with secured debts.
Before taking on a secured debt, you must ensure you can handle monthly payments, even during financial challenges.
Unsecured debt doesn’t rely on collateral to back the loan. Lenders approve these loans based on your credit score, income, and financial history. Without assets securing the debt, borrowers avoid the immediate risk of losing property if they can’t make payments.
However, the lack of collateral increases the risk for lenders, which means unsecured debts often have higher interest rates.
Common examples of unsecured debt include:
While nothing can be taken from you, you may face steep late fee costs if you miss payments. These higher rates can make managing unsecured debt more challenging over time.
Staying on top of payments is the key to managing any unsecured debts. Otherwise, you can find yourself in a debt spiral very quickly due to the high interest rates associated with these loans.
A failure to repay secured and unsecured debts leads to distinct consequences, each with serious financial implications.
Failing to keep up with secured debts means losing something physically.
If mortgage payments are missed, the lender can initiate foreclosure proceedings, putting your home at risk.
Similarly, falling behind on car loan payments often puts your car at risk of repossession. Losing these essential assets disrupts daily life and can make recovering financially even harder.
Your credit score will also be severely hurt if you fail to keep up with payments on a secured debt. This will make it harder for you to secure credit or loans in the future.
Unsecured debts carry different but equally impactful risks.
Without collateral to reclaim, lenders may escalate collection efforts by hiring collection agencies or pursuing legal action against you.
Missed payments will also damage your credit score.
Persistent defaults may result in your wages being garnished or court judgments, further straining your financial stability.
Effectively managing debt begins with understanding how to prioritize repayment. Secured and unsecured debts require different approaches to ensure financial stability and avoid further complications.
Secured debts, such as mortgages and car loans, should take top priority. Missing payments on these debts can lead to foreclosure or repossession, resulting in the loss of essential assets. To avoid this, focus on staying current with secured debt payments.
Review your loan terms, speak with your lender about repayment options if you're struggling, they may be able to help you change the terms so you can afford the payments.
You can also consider consolidating other debts to free up funds. This involves turning other loans into one monthly payment at a lower interest rate, freeing up money for you to use for your secured debts.
As unsecured debts, like credit cards, often come with higher interest rates, it can be challenging to get back on track once you fall behind.
Paying more than the minimum each month or targeting the highest-interest debts first can help reduce the overall financial burden. By focusing on the debt with the highest interest first you can save money in the long run by reducing the amount of interest you pay in the long run. This is known as the “avalanche method.”
If making consistent payments is difficult, explore options like debt consolidation or speaking with a Licensed Insolvency Trustee to evaluate your options.
Managing multiple types of debt requires a balanced approach. Start by creating a budget that prioritizes secured debt payments while allocating funds for unsecured obligations. Track spending, cut unnecessary expenses, and consider automating payments to avoid late fees. Building an emergency fund can also help cover unexpected costs, preventing further debt accumulation.
Taking control of debt begins with a clear strategy. Focus on protecting essential assets while addressing high interest liabilities.
If your debt feels overwhelming though then seeking professional guidance can help you get back on track.
If debt feels unmanageable, a Licensed Insolvency Trustee can provide the guidance and solutions you need. Licensed Insolvency Trustees are federally regulated professionals who specialize in helping Canadians regain financial stability. They’re legally required to act in your best interest and provide unbiased advice tailored to your specific situation.
Our Licensed Insolvency Trustees will review your entire financial picture, including your secured and unsecured debts. They’ll help you understand all the options available to relieve your debt and what each one means for you.
Our Trustees take a judgment-free approach. They focus on helping you, not shaming you for your financial struggles.
The first consultation with an LIT is always free of charge.
November 19, 2025
Understand the difference between secured and unsecured debt, with examples and tips on which type to prioritize when paying off loans.
