Unsecured Debt

What is 'Unsecured Debt'

Unsecured debt is 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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