Unsecured Debt

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DEFINITION of 'Unsecured Debt'

A loan not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and any other type of loan or credit that was extended without a collateral requirement. It presents a high risk for lenders since they may have to sue to get the money they're owed if the borrower doesn't repay the full amount owed. As a result of this high risk, unsecured debt tends to come with a high interest rate. Unsecured debt can be wiped out by bankruptcy, but taking this dramatic step makes it more difficult to obtain financing for the next seven to 10 years.

BREAKING DOWN 'Unsecured Debt'

Secured debt, on the other hand, is backed by an asset, also known as collateral. Under the terms of a secured loan, the lender can seize the collateral used to guarantee the loan if the borrower defaults. Examples of secured debt include mortgages, which are secured by houses, and auto loans, which are secured by cars. Because the borrower has more to lose by defaulting on a secured loan and the lender has something to gain, this type of loan will have a lower interest rate than an unsecured loan.

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RELATED FAQS
  1. What is the difference between secured and unsecured debt?

    The difference between secured and unsecured debt is the presence or absence of collateral backing. Secured Debt For a debt ... Read Full Answer >>
  2. How long do typical debt management plans take to pay off debt?

    Debt management plans are professionally budgeted and guided payment plans designed to help consumers repay debts. In some ... Read Full Answer >>
  3. What debts don't have a statute of limitations applied to them?

    The statute of limitations on a debt refers to the legal time frame in which creditors may pursue a debt through the court ... Read Full Answer >>
  4. In a corporate liquidation, why are unpaid taxes and wages paid before general creditors ...

    The Bankruptcy Code, section 507, states that when a corporation is liquidated, creditors are paid in a particular order: ... Read Full Answer >>
  5. How can I take a loan from my 401(k)?

    The majority of employers offer eligible employees the opportunity to save for retirement in a qualified plan through paycheck ... Read Full Answer >>
  6. What is the difference between a possessory and a non-possessory lien?

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