Secured vs. unsecured debt
The first distinction that matters is whether an asset backs the debt. A mortgage and an auto loan are secured — the lender can recover the vehicle or the property if payments stop. Credit cards, most lines of credit and payday loans are unsecured — the lender has no collateral and relies on your income and credit standing as the only recourse.
Secured debt usually carries a lower interest rate because the lender's risk is lower, but the consequence of default is more immediate and tangible: repossession or, for a mortgage in Ontario, power of sale. Unsecured debt carries higher rates to compensate for the lack of collateral, but generally offers more room to negotiate before a creditor escalates to legal action.
Explore each type
Use the tabs below to review the overview, primary risk and recommended strategy for each of the five most common categories of consumer debt in Canada.
Unsecured Consumer Debt
Personal lines of credit, unsecured installment loans and buy-now-pay-later balances that are not tied to a specific asset. Lenders extend these on creditworthiness alone, so rates run higher than secured products.
Primary risk: No collateral to seize directly, but default is reported to Equifax Canada and TransUnion Canada and can lead to legal action or wage garnishment through the courts.
Recommended strategy: Consolidate multiple unsecured balances into a single lower-rate facility where possible, or negotiate a lump-sum settlement. These accounts are usually the most flexible to restructure because the creditor holds no collateral to recover instead.
Setting a handling priority
When a household is managing more than one type at once, priority is usually set by two factors: cost of carrying the debt and consequence of default. Payday loans and high-rate credit cards should typically be addressed first because of their cost. Secured debt — the mortgage payment in particular — should never be allowed to lapse even while unsecured balances are being negotiated, because the consequence of default is loss of the asset itself.
Keep secured payments current
If your budget is tight, prioritize your mortgage and auto loan payments ahead of unsecured debt. Falling behind on unsecured debt damages your credit; falling behind on secured debt can cost you the home or vehicle outright.
Common mistakes by type
- Payday loans: rolling one loan into another rather than addressing the underlying shortfall, which compounds cost rapidly.
- Credit cards: paying only the minimum, which is calculated to extend repayment for years while interest compounds daily on the remaining balance.
- Auto loans: extending the term to lower the monthly payment without accounting for the additional interest paid over a longer amortization, or going "upside down" relative to the vehicle's depreciating value.
- Mortgages: waiting until a payment is missed before contacting the lender, rather than requesting a hardship arrangement in advance.
- Unsecured lines of credit: treating a revolving limit increase as new spending capacity rather than a tool reserved for emergencies.
For a step-by-step framework that applies across all five types, see Six Steps to Get Out of Debt.