What Is Unsecured Debt?

What Is Unsecured Debt?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Unsecured debt is a type of debt that is not linked to any kind of collateral. Simply put, it’s a type of loan or credit that you receive based on your promise to repay. Often, lenders approve these loans based on your creditworthiness. Common examples include credit cards, personal loans, student loans, and utility bills. In case you default on payment, lenders cannot seize any physical items to recover their loan. Instead, they might resort to debt collectors, file a lawsuit, or report default to credit bureaus, which negatively affects your credit score.

Related Questions

1. What is a secured debt?

A secured debt is a type of loan or credit that is linked to an asset, often referred to as collateral. Examples include mortgages (where your house is collateral) or car loans (where your car is collateral). If you default on repayment, the lender has the right to seize the asset used as collateral to recoup their money.

2. What happens if I don’t pay my unsecured debt?

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If you fail to make payments towards an unsecured debt, the lender may take several actions. They might pass the debt to a collection agency, file a lawsuit against you or report your default to the credit bureaus, thereby damaging your credit score. It may become harder for you to secure loans or credit in the future.

3. How can I manage my unsecured debt?

Managing unsecured debt involves keeping regular track of your spending, prioritizing payments for debts with higher interest rates, and making an effort to not miss any payments. It may also be useful to set up automated payments to ensure you don’t forget due dates. If you’re struggling with debt, you can reach out to a financial advisor or a non-profit credit counseling agency for guidance.

4. Where can unsecured debt be incurred?

Unsecured debts can be incurred from various sources like banks, credit unions, and online lenders in the form of personal loans, credit card debts, student loans, and medical bills. Even unpaid taxes and utility bills are considered unsecured debts.

5. What is the risk for lenders with unsecured debt?

For lenders, the risk with unsecured debt is higher compared to secured debt. Since there’s no collateral, if a borrower defaults on a loan, they may have to resort to methods such as debt collection or legal action. Because of this added risk, interest rates on unsecured loans are usually higher.