Financial Friday: Secured DebtFinancial Friday
What Is Secured Debt?
Secured debt is debt-backed or secured by a collateral to reduce the risk associated with lending. If the borrower on the loan defaults on repayment, the bank seizes the collateral, sells it, and uses the proceeds to pay back the debt. Assets backing debt or a debt instrument are considered a form of security, which is why unsecured debt is considered a riskier investment than secured debt.
- Secured debt is debt that is backed by collateral to reduce the risk associated with lending.
- In the event a borrower defaults on their loan repayment, a bank can seize the collateral, sell it, and use the proceeds to pay back the debt.
- Because loans that are secured have collateral backing them, they are considered less risky than loans that are unsecured, or that have no collateral backing.
- The interest rate on secured debt is lower than on unsecured debt.
- In the event of a company's bankruptcy, secured lenders are always paid back before unsecured lenders.