Unsecured Vs Secured Debts – A Brief Explanation

2015-04-21

Martine Lessard

There are two basic types of consumer debts: unsecured and secured. Below is a brief overview of the main differences between them.

Person talking on a cellphone looking at spreadsheets on their laptop

Unsecured Debts

An unsecured debt means that when you buy something, the creditor cannot take back the purchased goods if you do not pay. An example of an unsecured debt is a purchase made using a credit card; you then owe the credit card company the money and they don’t have the right to ask for the purchase back. Income taxes, rent and public services (electricity, cable TV), as well as personal loans are also usually considered unsecured debts. 

If you are unable to repay your unsecured debts, the creditor can still come after you in other ways – for example, by making threatening phone calls or garnishing your wages with a judgment. Filing for bankruptcy or creating a Consumer Proposal can protect you from further action by the creditor and allow you to resolve your debt challenges.

Secured Debts

A secured debt is when you make a purchase or borrow money, but the creditor asks for the purchase / asset to act as collateral. Examples of secured debts include car loans, car leases or a mortgage on a house. Also, if you buy something with an installment sales contract (i.e. furniture), it would be considered a secured debt. In all of these cases, the creditor has registered a lien on the asset. In other words, if you are unable to keep up your payments on your car or home, the creditor may be in a position to take back the item. However, before a secured creditor repossesses an asset, there are legal proceedings that the creditor must comply with and notices which must be sent to you to give you the opportunity to pay the loan.

Before you sign any purchase agreement or contract, read it first and take note of all unsecured and secured items. Make sure you understand exactly what you are signing before making a significant purchase.