Dave Ramsey says: Explaining unsecured and secured debt

Dear Dave,

What exactly is unsecured debt, and how is it different from secured debt?

— Rich

Dear Rich,

“Unsecured” debt generally means someone loaned you money, but they don’t have a lien on anything.

Credit cards and student loans are examples of unsecured debt, because there’s nothing they can directly repossess if the borrower doesn’t pay.

However, they can sue you if you don’t pay, and get a lien against something after they sue you. In some cases, this is done against your income by garnishing your wages.

Some examples of “secured” debt would be things like a home mortgage or car loan. A home mortgage loan is secured by the home.

If you don’t pay, they can foreclose and take the house.

The same is true with a car loan. If you don’t make the payments, they can take the car.

Typically, unsecured debts will be the last debts you pay if you’re in financial trouble.

You’d make the car payment before paying on your student loan, and you’d make your house payment before paying on a credit card.

Hope this helps, Rich!

— Dave

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