What is unsecured debt? | The bank rate
Unsecured debt is a type of debt that does not use collateral to secure the loan. Things like auto loans and mortgages are considered secured debt because the car or house could be repossessed if you don’t pay off the loan. Personal loans, on the other hand, are often considered unsecured debt because they do not carry the same risk.
What is unsecured debt?
Unsecured debt is debt that is unsecured – in other words, a lender cannot repossess or seize an asset that you own. As the debt has no assets attached to it, it is riskier for the lender. To offset this risk, lenders typically charge higher interest rates.
The interest rate charged on your unsecured debt is based on your creditworthiness. If your credit is good to excellent, you will get the best rates.
It is common to incur this form of debt. As long as you know how to properly manage your debt, you can use unsecured debt to secure your financial future.
Examples of unsecured debt
Some common forms of unsecured debt are credit cards, student loans, and personal loans. If you don’t pay off your student loan, your property won’t be taken – nothing has been put as security.
Although lenders generally charge higher interest rates on unsecured debt, there are ways around this problem. For example, you might be able to get a 0% introductory rate on a credit card. Another way to get around the higher interest rates would be to pay your credit card bill in full each month.
What happens if you don’t pay unsecured debt?
Although a lender cannot initially take your assets so as not to pay off unsecured debt, you will face other consequences. On the one hand, you will be charged a late fee for any late payment. And if you go too long without making a payment, your unsecured debt will go to a collection agency.
Once your debt is sent to the collection agency, your credit score will go down, since payment history is 35% of your score. This will make it more difficult for you to obtain successful loans in the future.
Depending on the type of unsecured loan you have, your pay may be subject to garnishment if you don’t pay off your debt. A creditor can also sue you and place a lien on your property. If a court gives a judgment to the lender, it could put your personal property at risk. Laws vary from state to state as to what personal property would be exempt from seizure.
Unsecured debt vs secured debt
Unlike unsecured debt, secured debt is associated with an asset. Two of the most common forms of secured debt are mortgages and auto loans. If you don’t pay these debts, a lender can foreclose your home or repossess your vehicle.
Since secured loans are backed by assets, lenders usually charge lower interest rates. For example, while they are similar products in terms of loan size and repayment terms, secured home equity loans have an average rate of 5.78%, while unsecured personal loans have an average rate of 5.78%. average rate of 11.88%.
However, both secured and unsecured debt have an impact on your credit. If you miss a payment, it can be reported to the three major credit bureaus: TransUnion, Experian, and Equifax.
|Unsecured debt||Secured debt|
|Interest rate||Usually higher||Usually lower|
|Consequences of default||Lower credit score||Lower credit score and takeover of the attached asset|
|Obtaining a title after repayment of the loan||No||Yes|
How to get rid of unsecured debt
To eliminate unsecured debt, you basically have two options: pay it off or file for bankruptcy.
If you are looking to get rid of unsecured debt faster, you can do so by cutting back on your expenses and reallocating the money you saved towards eliminating your debt. You can also consider refinancing your unsecured debt to get a lower interest rate or lower monthly payments.
However, if you are facing extreme financial difficulties or if your credit score is not good, these two options might not be the right solution for you. In this case, you might consider filing for bankruptcy.
Filing for bankruptcy will allow you to get rid of some unsecured debt like credit card debt, payday loans, and personal loans. For student loans, you must prove that repayment would cause undue hardship in order to receive a discharge.
The bottom line
With unsecured loans, your assets are not at risk of foreclosure unless the court makes a judgment on the lender. However, it is still important to understand the consequences of not paying your unsecured debt. To avoid late fees and serious damage to your credit score, create a plan to pay off your unsecured debt before you apply.