You hear a lot of talk about the different kinds of debt – “good” debt vs. “bad” debt, “secured” debt vs. “unsecured” debt – but often no one explains the differences. While there is much argument about what constitutes “good” debt – some say student loans and mortgages are “good,” while others say taking on any excessive amount of debt is “bad” – there is a more concrete difference between secured and unsecured debt.

According to Investopedia.com, secured debt is backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.  

On the contrary, unsecured debt is when a lender loans money without the security that an underlying asset provides. For this reason, unsecured debt carries more risk for the lender, which in turn makes the loan more expensive. The more additional risk that a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher rates.

If trying to manage money and avoid additional fees, higher payments and complex loan terms, aim to have secured debt, if you must borrow money. The lower, often fixed interest rates will come in very handy if economic flux causes interest rates to skyrocket. While a variable interest rate may be lower in the short-term, its unpredictability could result in minimum payments you just can’t meet down the road.

Be sure to talk through all loan options and terms with your banker or financial planner, and read all documents closely – especially the fine print. Every loan situation is different, and doing what’s best for your situation – both now and in the long term – is what’s most important.