If you are considering taking a new debt, then you should know the difference between secured and unsecured debt and then choose the one after understanding the difference between the two.
In this guide, we look at what unsecured debt is and all things you should know about it.
- Credit cards, hospital bills, utility bills, etc. are some examples of unsecured debt.
- Failure of repayment can ruin your credit score drastically.
What Is Unsecured Debt?
Unsecured debts are the type of loans that do not have collateral to back those debts up.
Because the borrower does not have to put in any specific assets as security for the loan, the lender might lose their money altogether if the borrower fails on the loan.
The Unsecured debt interest rates are much higher than secured debts since the lender considers them to be riskier.
Unsecured loans are generally loans that we pay on a monthly basis or loans that you get from a friend or a family member in the hopes of paying them back.
The majority of legal debts that you get from banks or other institutions are secured debts where you have to back them with some type of asset in case of a default of payment.
Unsecured debts are generally small amounts and do not hurt the lender most of the time.
However, unsecured debts generally do not become a problem until you miss several deadlines of recurring payments on the bills.
Note: Failure of any debt repayment can hurt your credit score directly. We recommend you hire a Credit Counsellor or the top debt relief company to manage your debts.
Risks and Examples of Unsecured Debt
An unsecured loan is a loan that has no guarantee with any kind of assets supporting the loan.
- Credit cards
- Hospital bills
- Utility bills
- Payday loans
- Personal loans
and other situations in which you get credit without the necessity of collateral are examples of unsecured debt.
A mortgage is a type of secured debt. This indicates that the lender has protection as your house which can be used to cover in case of debt repayment failure.
Unsecured loans are more dangerous for lenders since the borrower may not be able to pay that debt and could even declare bankruptcy.
In this case, the lender has the right to sue the borrower to get any outstanding payment of their debt.
If there are no assets to back up as collateral to the debt, the lender may not be able to get their initial money for the debt.
Even though declaring bankruptcy could let the borrowers postpone debt repayment, it still has major disadvantages and consequences.
Borrowers who have bankruptcy on their credit file and financial reports could hardly get any kind of loan in the future, or it would be impossible to get anything because bankruptcy will demolish your credit score for years straight.
Meanwhile, lenders may explore different means of recouping their investments.
Lenders can sue the borrower as well as report any instances of not repaying the debt and defaulting to credit rating agencies so that banks will also be aware of this situation.
Alternatively, the lender might work with a credit collection firm to pursue recovery of the outstanding amount. 2
Pros & Cons of Unsecured Debt
- No risk ofo personal property.
- Easy application process.
- Do not need to have a collateral to obtain unsecured loan.
- Need to have a high credit score to be eligible.
- Interest rates are usually higher.
- Require steady income to be eligible.
Secured debt is just the opposite of unsecured loans. Under secured loans, your debts are covered by collateral, and in case you fail to pay your debts, then the creditor will have the right to seize your collateral or property.
However, the terms of a secured loan are much more flexible as the creditors have protection guaranteed against the loan. 3
Types of Secured Loans
Here are examples of secured loans:
- Pawnbroker loans
- Car finance
- Logbook loans
Secured Vs. Unsecured Debts
Unsecured debt, as the name suggests, is a debt you get without giving any kind of security like an asset to back the debt.
These debts are generally simple stuff like credit card bills, phone bills, utility bills, and so on.
For these debts to become a massive problem and you get sued, you have to miss out on several bill payments.
The lender (generally a company) has to go to the necessary authorities to claim their debt unless you have already declared bankruptcy and legally can not pay it back.
What is Secured Vs. Unsecured loans?
Under secured loans, the creditors put collateral for security against the loan, and in an unsecured loan, the loan is given based on the creditworthiness of the person without any collateral or security.
Unsecured loans lasts for how long?
In many states, the debt does not disappear or expire until you repay it. And an unpaid debt can appear on your credit report for up to 7 years.
Is it possible to write off unsecured loans?
To those wondering if it is even possible to write off unsecured loans, the answer is yes, it is possible.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.
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