Unsecured Debt

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Trust Certificate

    A bond or debt investment, usually in a public corporation, that ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, ...
  3. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  4. Debtor

    A company or individual who owes money. If the debt is in the ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties ...
  6. Default Risk

    The event in which companies or individuals will be unable to ...
Related Articles
  1. 5 Ways To Control Emotional Spending
    Budgeting

    5 Ways To Control Emotional Spending

  2. Negotiating A Debt Settlement
    Budgeting

    Negotiating A Debt Settlement

  3. 5 Signs That You're Living Beyond Your ...
    Budgeting

    5 Signs That You're Living Beyond Your ...

  4. A Guide To Debt Settlement
    Credit & Loans

    A Guide To Debt Settlement

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center