Secured vs Unsecured Credit
Understand the differences between secured and unsecured credit.
One big distinction between different types of credit is whether the credit line is secured or unsecured. Secured credit refers to any credit line that’s backed by collateral. Unsecured credit refers to any credit line that doesn’t have collateral. This distinction is important because it impacts several aspects of debt repayment:
- Secured credit tends to offer lower interest rates, even if you have bad credit
- Collateral has a big effect on what happens if you don’t pay what you borrowed back.
How is credit secured?
Secured credit refers to any loan or credit line that requires collateral. When it comes to loans, the property you purchase with the loan is often the collateral used to secure it. So, for instance, your home is the collateral for a mortgage and your car is the collateral for an auto loan. But property that’s purchased with a loan is not the only way to secure a line of credit. If you get a loan at a pawn shop, you generally offer something up as collateral, anything from jewelry to electronics to guns.
There are also secured credit cards. These are credit cards that you can get even with a bad credit score or no credit score. You put down a cash deposit and the creditor extends you a credit line of equivalent value.