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.
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, 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.
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 necessary authorities to claim their debt unless you have already declared bankruptcy and legally can not pay it back.
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.