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I am trying to better understand the difference or similarity among the following terms:

  1. Secured/Unsecured Debt
  2. Security Interests

For example, when I hear the term secured debt, I immediately think about mortgages. The homebuyer purchases a home and puts down 20%, but the bank finances the rest. It is secured debt since the bank can take the home away from the homebuyer in case of personal bankruptcy or continued no payment.

When I think about unsecured debt, it reminds me of the junk mails offering me a line of credit based on my wage or credit score. Technically, this doesn't sound unsecured, because if I don't make good on payments, debt collectors will infiltrate my bank account, furniture at home, and et cetra.

My questions are:

(1) What is the difference or similarity between the secured debt and security interests? What are some real-life examples that demonstrate the clear difference or similarity?

(2) Is there an equivalent term for unsecured debt in interests (e.g. unsecured interests)?

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Your understanding of a "secured debt" is correct. Mortgage is a good example. Car loans work similarly. Generally, a debt is secured if the lender can take possession of an asset without any additional legal action.

In case of "unsecured debt", the lender cannot infiltrate your bank account or home. Credit cards are an example of unsecured debt. If you don't make credit card payments, no-one will come and start taking furniture away from you. To be able to do that they will need a court order, i.e.: they'll need to sue you, take a legal action. The judge will then determine what, if anything, they can take from you or alternatively compel you to pay.

When you get a secured debt, the lender gets a security interest. Mortgage is a security interest. Your mortgage agreement includes two things: a note (your agreement to pay the loan) and a trust deed (or a similar instrument), which is the security instrument that allows the lender to take possession of your property if certain conditions are not met.

The interest is not secured, it's security interest. The debt is secured, by that interest. So no, there are no unsecured interests.

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  • Excellent. Thanks, it helped a lot! Commented May 27, 2022 at 5:54

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