Secured vs Unsecured Loan, Debt, Credit Cards & Line of Credit

Updated January 21, 2024

We often talk to consumers about a secured vs unsecured loan or debt and how each is treated in personal bankruptcy or consumer proposal situations. We often forget that not all consumers are familiar with credit terms, so let’s get into a brief explanation of each. 

Difference Between a Secured vs Unsecured Loan

When you’re considering filing an insolvency proceeding (a consumer proposal or bankruptcy), it’s important to understand how a secured vs unsecured loan will be affected. 

What is a Secured Loan?

Simply speaking, a secured loan is a loan that is secured by tangible collateral. This collateral could be a house, a car, a boat, or anything else of value that the banks can repossess in case you default on the loan.

In addition, some loans may be secured by a signatory rather than a tangible object. In this instance, the loan is guaranteed by your co-signer. If you default on the loan payments, the lender will require the co-signer to take over payments or pay the loan in full.

When you file personal bankruptcy or a consumer proposal, secured loans are generally not impacted. You can usually keep the assets as long as the loan payments are current and continue to be paid. This means, in plain language, that you likely won’t lose your house if you file bankruptcy.

If you don’t wish to keep the asset, you can choose to walk away from the loan and allow the secured creditor to take possession of the asset. If there is an outstanding balance after the lender sells the asset, it will be included as an unsecured debt in your personal bankruptcy or consumer proposal.

Examples of a Secured Loan

• Mortgage Loan
• Home Equity Loan
• Car Loan
• Boat Loan
• Recreational Vehicle Loan
• Title Loan
• Agricultural Loan (if using land or equipment to secure the loan)
• Construction Loan (if using land to secure the loan)
• Business Loan (If using inventory, equipment, or open invoices to secure the loan)
• Stock Loan (a loan against your stock portfolio)

What is an Unsecured Loan?

An unsecured loan is money that is given on the promise that you’ll pay it back. There is no tangible object that the lender can repossess should you default on the loan.

Regardless of which insolvency proceeding you choose, only your unsecured loans will be dischargeable, except where you wish to surrender the underlying asset that secures the secured loan.

Examples of an Unsecured Loan

• Personal Loan
• Credit Card
• Student Loan
• Personal Line of Credit
• Payday Loan
• Signature Loan
• Debt Consolidation Loan

Difference Between a Secured vs Unsecured Debt

In most instances, secured debt is the result of a secured loan (like a car loan), and unsecured debt is the result of an unsecured loan (like a credit card). This isn’t always the case. Below, we’ll look at secured vs unsecured debt that doesn’t result from a loan.

Not sure which debts can and cannot be included in a consumer proposal or bankruptcy? Check out our article discussing which debts are released by the two options.

What is a Secured Debt?

You usually acquire secured debt in exchange for a secured loan. You will give the lender security against certain assets, such as a mortgage on your house or a lien on a vehicle. The security against the asset(s) allows the lender to take back the asset should the borrower default on the loan or mortgage payments. 

For a partial list of secured debt, you can take a look at the examples above under the header “Examples of a Secured Loan”. Below, we’ll look at a few examples of secured debt that don’t originate from a secured loan.

Examples of a Secured Debt (Not Originating from a Secured Loan)

• Unpaid Property Taxes (these are secured by the property)
• Unremitted taxes on account of payroll source deductions (if you are a business owner.

What is an Unsecured Debt?

Unsecured debt is usually, but not always, when a creditor lends you money based on your credit score or other lending criteria, and you promise to repay the debt. There are instances, though, when you may have unsecured debt that wasn’t borrowed.

For a partial list of unsecured debt, you can take a look at the examples above under the header “Examples of an Unsecured Loan”.

Whether you file personal bankruptcy or a consumer proposal, all unsecured debts must be included, and all unsecured creditors can share in any bankruptcy or proposal proceeds.

Difference Between a Secured vs Unsecured Credit Card

Credit cards may be secured or unsecured, depending on the type of card.

What is a Secured Credit Card?

If your credit is very poor or non-existent, it’s likely the only credit card you’ll be able to acquire is a secured credit card. In this instance, you put down a deposit with a lender. In return, they give you a credit card with a limit equal to the deposit you placed.

When you make a purchase with these secured credit cards, you must pay back the borrowed amount, often with interest, at the end of every month. The deposit you placed on the secured credit card is only used to pay the balance if you default on the card.

What is an Unsecured Credit Card?

If you have great credit, a lender will likely offer you a credit card with a limit based on your credit score and other factors. This is an example of an unsecured credit card. No tangible collateral, like a deposit, is securing the credit card.

Difference Between a Secured vs Unsecured Line of Credit

Lines of credit can be very useful if you’re renovating a home, running a business, or for ongoing monthly expenses you’d rather not pay out of pocket. The line of credit is usually borrowed against in installments, as opposed to the lender giving you a lump sum all at once. This means you only pay interest on the money you have spent, not on the entire loan.

In addition, a secured line of credit usually offers lower interest rates since the lender has less risk of losing their money. As far as a secured vs unsecured line of credit goes, only an unsecured line of credit can be renegotiated in an insolvency proceeding. Let’s look at the other differences between the two.

What is a Secured Line of Credit?

A secured line of credit uses a form of collateral to secure the line of credit. Typically, this is against the equity in your home or business assets. If you default on a secured line of credit, your lender can place a lien on these assets to recoup the money they have lent you.

Examples of a Secured Line of Credit

• HELOC (Home Equity Line of Credit)
• Business Line of Credit (Secured by business assets or accounts receivable)
• Personal Line of Credit (Secured by a savings account, investment portfolio, or valuable personal property)

What is an Unsecured Line of Credit?

An unsecured line of credit is based solely on the strength of your credit report or the financial strength of your business. If you default on an unsecured line of credit, the lender has no collateral to repossess, so they must resort to legal means to recoup their money.

Examples of an Unsecured Line of Credit

• Personal Line of Credit
• Business Line of Credit
• Credit Cards (a credit card with a maximum limit is basically just a line of credit)

Why Knowing the Difference Between a Secured vs Unsecured Loan or Debt is Important

Knowing the difference between a secured vs unsecured loan or debt is just the first step if you’re experiencing financial hardship. This will help you understand how your creditors may proceed if you cannot (re)pay these loans and debts.

If you’re unable to repay a secured loan, you’re likely to see the collateral that secured the loan foreclosed upon or repossessed. If the lender is unable to recoup all of their money with the repossessed collateral, more legal actions will follow, such as: 

• liens on other assets,
• wage garnishments, and 
• freezing your bank accounts.

If you’re unable to repay an unsecured debt, creditors can use a multitude of legal actions to recoup their money, including:

• taking you to court,
• selling your debt to collection agencies,
• liens on assets,
• wage garnishments, and
• freezing your bank accounts.

The legal hardships that await from the non-payment of secured and unsecured loans could lead to financial ruin. But it doesn’t have to.

Can’t Repay a Secured or Unsecured Loan or Debt?

Whether it’s a secured vs unsecured loan or debt, we help you avoid the legal issues resulting from non-payment. We can usually:

• stop all collection calls,
• stop all legal action against you,
• negotiate your unsecured debt down to a fraction of what you owe,
• wipe out all past, current, and future interest payments on unsecured debt, 
• and protect your assets.

Contact us today to set up a no-cost initial consultation to discuss your situation and the options available to you.