Secured loans are when you grant the creditor a security interest as a condition of the loan, such as when you go to a bank and get a car loan. In a car loan situation, the bank typically requires you to give it a lien against the car you purchase. When you fail to repay the car loan the bank can then take possession of the car because it is a secured creditor. Unsecured creditors cannot do this because they do not have a lien or security interest in your property. However, unsecured creditors can obtain a lien through the court.
If you fail to pay back a debt, your creditors can elect to try to collect the unpaid money in a variety of ways. Apart from convincing you to send payment, the creditors can take your property and sell it to recover the money. However, they can only do this under certain situations. An unsecured creditor, one which does not have a security interest in your property, can place a lien against your home but only after it sues you in court and wins.
Secured and Unsecured
A lien is a property interest a creditor takes in your real property. If you fail to repay the debt, the creditor can take possession of that property through the foreclosure process. The lien itself is not a foreclosure, but allows the creditor to take the next step and begin the foreclosure process. Creditors can also place a lien on other forms of property such as your car.
For an unsecured creditor to place a lien against your home, it must first sue you in court and win its case. Once it wins the debt lawsuit it can then take collections actions that include filing a judgment lien, repossessing your property or garnishing your wages. The lawsuit process differs slightly between jurisdictions, but regardless of where you live you are entitled to appear in court and defend against the lawsuit. If the creditor is unable to prove its case and loses, it cannot place a lien on your property.
Even if an unsecured creditor does not file a lawsuit against you and subsequently places a lien on your home, the creditor has other options to try to collect on the unpaid debt. If you have an unsecured loan in which you fail to pay on time, this can negatively affect your credit rating regardless of whether the creditor files suit against you. If the creditor hires a collection agency to collect the debt, this can further impact your credit score and the creditor can still file a lawsuit against you if the collection attempts fail.
- Photo Credit Comstock/Comstock/Getty Images