Kinds of Debt

Secured Debt:

This is debt ‘secured’ by collateral. A familiar example of this would be a financed car purchase, by which the purchase has been financed by a lender who has registered its interest on the vehicle. In the event that the purchaser fails to make payments, the lender can then repossess the vehicle. If the purchaser then fails to catch up the missing payments and the costs of repossession, the lender can simply sell the vehicle. Any shortfall, known as a ‘deficiency balance,’ between what the lender gets from the sale and the loan plus repossession and sales expenses becomes, in most jurisdictions, the responsibility of the borrower to pay. There are some exceptions, such as British Columbia, where the lender cannot pursue the borrower for this difference.

Unsecured Debt:

This is debt for which there is no collateral or security held. What unsecured means is that if the payments are not made as required there is no collateral to repossess. In other words, the debt is only backed by a promise to pay. Examples of this kind of debt are credit cards, bank/credit union overdrafts, many Lines of Credit and personal loans. Interestingly, the ‘deficiency balance’ mentioned above is actually considered unsecured debt, the collateral having been seized and sold.

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