How Does Secured Debt Work?

What Is Secured Debt?

Secured debt is money owed to a creditor that is “secured” by a specific piece of real property (like a house or land) or personal property (like a car). Common examples of secured debts are:

• Home mortgages

• Home equity lines of credit 

• Auto loans

• Secured credit cards

Secured Debts and Collateral

Secured debts are backed by collateral (valuable property). If you don't pay the loan as agreed, the lender can take the collateral or property back.

There are two main types of property: real property and personal property.

🏠 Real property includes like your home and the land it sits on. Mortgage loans are secured by real property (your house). When you buy the house, you borrow money from the bank in the form of a home mortgage.

If you don't repay the mortgage as agreed (or violate certain terms of the mortgage, such as keeping proper homeowners insurance), the lender can reclaim the property through a process called foreclosure.

🚘 Personal property includes things like your car, clothes, and household goods. The most common type of personal property that secures a debt is a car that secures a car loan.

Because the car acts as collateral for the loan, the bank can reclaim the property through a process called repossession if you don't pay the car loan as agreed.

How Secured Debt Works

Here's a more technical explanation of how secured debt works, using some of the terms you'll likely hear if you take out a secured loan like a mortgage or car loan.

Secured debt is a loan that’s backed, or secured, by something valuable you own — called collateral. The collateral could be a car, a house, or other assets. When you take out a secured loan, you agree in writing (through a loan agreement) that the lender can take or sell the pledged property if you don’t make the payments.

This arrangement gives the lender, also called the creditor, a legal right in your property known as a lien. The lien stays in place until the debt is paid in full. If you fall behind, the lender can use this lien to make a creditor’s claim against your property. That claim can lead to repossession (taking back a car or other personal property) or foreclosure (selling a home or real estate).

🏛️ Sometimes, if the lender has to go to court to enforce their rights, they may get a court judgment confirming they can take the property. This can also happen with certain tax obligations, where the government places a lien on a debtor’s property until the taxes are paid.

In short, with secured debt, the risk is tied directly to the pledged property — if you don’t pay, you could lose it. That’s why secured loans often have lower interest rates than unsecured loans, but they carry the added risk of losing the assets you’ve put up as collateral.

Secured Credit Cards

Secured credit cards are a bit of a mix between the two types of debt (secured and unsecured). To open a secured credit card, you pay a security deposit to the lender, and this becomes your credit limit. These cards operate like credit cards because you can use them anywhere credit cards are accepted. 

Unlike other secured debts, if you end up defaulting on your monthly payments, the bank or lender can’t take the stuff you purchased with the credit card. Instead, they can take the security deposit you paid when you opened the account. Secured credit cards are a popular way to establish or rebuild credit because your credit rating is less important to the bank or lender. They’re going to get paid no matter what. 

Secured vs. Unsecured Debts: What's the Difference?

The main difference between secured and unsecured debts is whether there's property backing the loan.

Secured debts are debts that are backed by collateral.

Unsecured debt is any debt that's not backed by collateral. The most common types of unsecured debts are:

• Credit cards

• Personal loans

• Medical bills

• Lines of credit

• Student loans

Unlike a home or car loan, if you don't repay, say, a student loan, the lender can't revoke the education or credentials you earned using the loan.

Because unsecured debts aren't backed by any property, they're riskier for lenders. This usually means you need to have a good credit score to get unsecured debt with a favorable interest rate. It also means they can sometimes be more difficult to get.

That brings us to the benefits of secured loans.

Benefits of Secured Loans

There are two main benefits of secured loans:

• Lower interest rates: Because the loan is backed by property (called collateral), lenders take on less risk and can often offer lower interest rates than with unsecured loans. They’ll still check your credit report, but your credit score usually matters less than it would for an unsecured loan or credit card.

• Easier credit approval: Because the loan is backed by collateral, it’s often easier to qualify for a secured loan even if your credit history isn’t perfect. You might still pay a higher interest rate than someone with excellent credit, but approval is usually easier than with an unsecured loan.

What To Do if You’re Struggling To Repay a Secured Loan

Falling behind on a secured loan can feel stressful, especially because your property is on the line. The sooner you explore your options, the more choices you’ll usually have to avoid repossession or foreclosure. Here are some steps you can take:

• Contact your lender right away.

  • Let your lender know about your situation as soon as possible. Many lenders have hardship programs that can temporarily lower your payment, reduce your interest rate, or allow you to skip a payment. These arrangements can help you stay current and protect your collateral while you get back on your feet.

• Ask about loan modification.

  • If your financial challenges are more than temporary, you may be able to modify your loan. A loan modification changes the terms of your agreement — for example, by extending the repayment period or reducing the interest rate — to make the monthly payment more manageable.

• Consider refinancing.

  • If your credit and property value allow, refinancing your secured loan could lower your monthly payment or interest rate. This works best if you can qualify for a new loan with better terms before you fall too far behind.

• Explore selling the property.

  • If keeping the collateral isn’t realistic, selling it voluntarily can help you avoid the added costs and credit damage of repossession or foreclosure. In some cases, you may be able to sell for enough to pay off the loan entirely.

• Get professional guidance.

  • If you aren't sure which path is best, consider talking to a nonprofit credit counselor or, in some cases, a bankruptcy attorney. They can help you understand your rights, the lender’s options, and what steps may protect your property and your finances.

Should I Get a Secured Loan for Debt Consolidation?

If you’re carrying high-interest credit card balances, one option some homeowners explore is using a secured loan — like a home equity line of credit (HELOC) — to combine those debts into a single, lower-interest payment. This approach can save money on interest and make repayment more manageable, but it also comes with important risks to consider.

A HELOC is secured by your home, so you need to have equity. This means your home is worth more than what you owe on your mortgage, and the monthly payment must fit your budget. With this method, you use the HELOC funds to pay off your credit cards, then focus on repaying the HELOC, often at a much lower interest rate.

🚨 The main caution is to avoid running up new credit card balances after consolidating. If you take on new debt while repaying a HELOC, you could find it difficult to keep up with payments. And since the loan is tied to your home, missing payments could put your property at risk.

What Happens to Secured Debt in a Chapter 7 Bankruptcy?

Filing Chapter 7 bankruptcy can erase your personal responsibility to pay a secured loan, but it doesn’t automatically erase the lender’s rights to the property you used as collateral. That means you’ll need to decide whether you want to keep the property or give it back.

If you want to keep the property, you have to keep making payments on it during and after your bankruptcy. This most often comes up with car loans.

Plus, if you're filing Chapter 7 bankruptcy, you have to be up to date on your payments as well. Most lenders won't allow you to reaffirm the loan (say you want to keep paying it and keep the car) if you're already behind on your loan.

If you want to give the property back — perhaps because the loan has become too expensive or the property no longer works for your situation — you can choose to surrender it to the lender. They’ll sell it, and any remaining balance on the loan will be wiped out in your bankruptcy. This can be a way to walk away from a loan without being stuck with leftover debt.

When you file your case, you’ll let the court and the lender know your choice on one of the required bankruptcy forms called the Statement of Intentions. This step makes it clear whether you plan to keep paying for the property or return it.

Chapter 13 bankruptcy handles secured debt differently and can give you more time to catch up on missed payments. If that’s something you’re curious about, you can read more in our article on Chapter 13 bankruptcy.