A debt is money that you owe. If a debt is secured, it means that you pledged property to insure repayment of the money you borrowed. When you pledge property to secure a loan, you are giving the creditor, or person you owe money to, special rights to the pledged property. This is often called a security interest or a lien. The property that you pledge is called collateral.
In most instances, you can keep the property that you pledged as security as long as you make the payments you agreed to make when you took out the loan. A pawn shop loan is an exception to this. In that situation, you leave the property with the pawn broker when you take out a pawn shop loan.
There are strict legal requirements that have to be met in order to create secured debt. These usually include:
If you don’t make the payments you agreed to make when you took out the secured loan, the creditor can take back the property (often called repossession or foreclosure).
There are different types of secured debts. Here are some common examples:
Home Mortgage. When you borrow money to buy or refinance a house, you give the bank a security interest in the house. If you don’t make the payments, the bank can foreclose on the house so that it can be sold to pay the debt. In some states, the bank has to go to court to foreclosure. In others, the bank can foreclose without going to court.
Car Loan. When you take out a loan to buy or refinance a car, you generally give the lender a security interest in the car. If you don’t pay, the lender can repossess (take back) the car without your permission, and sell it to recover the money owed.
Pawn Shop Loan. When you borrow money from a pawn shop, you have to leave the pledged property, such as jewelry or a watch, with the pawn shop until you have repaid the loan. If you don’t make the payments on time, you lose the property.