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Unsecured Loans

An unsecured loan is a loan that a lender gives you without asking for anything in return except your promise to repay. Debt you incur by using your credit card is unsecured debt. Medical bills and personal loans are also unsecured. A loan is always unsecured unless the lender takes steps to secure it.

Secured Loans

A secured loan is a loan that is backed by an interest in property. The property becomes collateral, and the lender takes a security interest in the collateral. If you default on the loan, the lender can take the collateral to satisfy the debt. Home mortgages and car loans are common examples of secured debts.

Default on an Unsecured Loan

If you miss payments on an unsecured debt, like a credit card, the lender can make a demand for you to make the payments. The lender can then file a lawsuit against you if you still do not pay. Once the court enters a judgment in favor of the lender, the lender can use the judgment to garnish your wages or your bank account. For example, if you have a credit card with a $3,000 balance and you stop making your payments, the credit card company can sue you. The credit card company can obtain a judgment in the amount of $3,000 plus interest and take money from your bank account or your paycheck until the judgment is paid in full.

Default on a Secured Loan

If you default on a secured loan, such as your mortgage payment or your car payment, the lender can take the collateral. For example, if you default on your mortgage payment, the lender can foreclose on your house and sell it. If you default on your car payment, the lender can repossess your car and sell it. Once the lender sells the property, the title is free of the security interest, or lien, and the debt is no longer secured. If the lender sells the property for less than what you owe on it, you will then owe an unsecured debt for the difference, which is called a deficiency balance. The lender can collect on the deficiency balance the same way unsecured lenders collect -- by filing a lawsuit, obtaining a judgment and garnishing your wages and bank accounts. For example, if you stop making your car payment and you owe $7,000 on the car, the car lender will repossess the car. If the lender then sells the car for $4,500, the security interest is gone, but a balance of $2,500 remains. The lender can then sue you for the $2,500 unsecured debt.