Secured debt

What It Means

Secured debt is a loan backed by collateral, something you own that the lender can claim if you stop paying. The most common examples are a mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more, which the home secures, and a car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more, which the car secures. Home equity loansHome equity loanA loan secured by your home's equity that pays out one amount at the start and is usually repaid at a fixed rate; often called a second mortgage. See more and home equityHome equityThe part of your home you own outright: its current value minus everything you still owe on loans secured by it. See more lines of credit (HELOCsHELOCA home equity line of credit: a revolving line secured by your home that you can draw on, repay and draw on again during a set draw period. See more) also use your home as collateral. Because the lender can recover part of its money from the property, secured loans usually come with lower interest ratesInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more than unsecured ones.

How People Say It

• "The car's collateral, so I pay that first."
• "They're pulling from the equity in the house."
• "Miss enough payments and the bank takes it back."

The Breakdown

A short example. Dani and Chris want to pay off $15,000 of credit card debt. A lender offers a home equity loan at a lower rate than their cards, and on paper it saves them interest.

Where it goes wrong. The swap turns debt with nothing behind it into debt secured by their house. Before the loan, falling behind on the cards would have hurt their credit and brought collections; after it, falling behind can put the home itself at risk, since the lender can move to foreclose. A lower rate is real money saved, and it comes with a bigger downside if a job loss or illness interrupts payments.

What to watch for

• Know which of your debts are secured and what property backs each one.
• Treat payments on secured debt as the ones that protect your home and car.
• Before turning unsecured debt into secured debt, ask what happens to the property if you can't pay.
• Read the loan papers for any other property named as collateral.

Good to Know

Experian explains that if you default on a secured loan you're likely to lose the asset you pledged, which for a mortgage is called foreclosure and for a car is repossession. Lenders generally report a payment as late on your credit report once it's 30 days past due, according to Experian and Equifax. If a mortgage or car payment is going to be hard to make, contact the lender before it's missed and ask what options it offers, and read your loan agreement for what it says happens on default.

Related Terms and Categories

• Unsecured debt

  Money you owe that isn't backed by collateral, such as credit card balances, medical bills and most student loans.

• Mortgage

  A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.

• Car loan

  An installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral.

• HELOC

  A home equity line of credit: a revolving line secured by your home that you can draw on, repay and draw on again during a set draw period.

• Secured credit card

  A credit card backed by a cash deposit you pay up front, which usually sets your credit limit; used mostly to build or rebuild credit.

Debt and credit