What Is Unsecured Debt?
A Twitter listener asks Dave to explain what unsecured debt is. Dave is happy to comply.
QUESTION: A Twitter listener asks Dave to explain what unsecured debt is. Dave is happy to comply.
ANSWER: That’s a good question. You’d be amazed at the number of people who don’t know the answer to that question. Unsecured debt means the lender that loaned the money does not have a lien on anything. A car loan is secured debt. It's secured by the car. They can take the car if you don’t pay the bill. A credit card is unsecured. It doesn’t have anything that they have a lien against. A home mortgage is secured by the home, meaning they take a lien against the home. They can foreclose and repossess the home. That’s a secured debt. A student loan is an unsecured debt. There’s nothing they can directly repossess if you don’t pay. They can come after and sue you, which is what unsecured debt does, and then they can actually get a lien against something after they sue you if you don’t pay, like against your income by garnishing your wages.
Unsecured debt is typically going to be the last debt that you pay if you’re in trouble. The first debt you pay would be something they can take. You’d pay your car payment before you pay your student loan. You’d pay your house payment before you pay MasterCard if you had to choose between the two. In a worst-case scenario, unsecured debt like a credit card in a bankruptcy gets nothing. The debt is just wiped off. They lose all their money. A car loan either gets paid or you’re going to give them the car. They’re at least going to get the car out of the deal. It’s the same thing with a house. A lender making a secured loan is in a better position than a lender making an unsecured loan.