Unsecured Debt – Types and Solutions (2024)

Unsecured debt is any debt that is not tied to an asset, like a home or automobile. This most commonly means credit card debt, but can also refer to items like personal loans and medical debt. Unsecured debt creates less stress and fewer problems for consumers because they don’t stand to lose an asset if they don’t repay the debt.

If you fall behind on payments for unsecured debts, your lenders have no claim on your property and cannot repossess items or foreclose on your home. That’s the big difference between unsecured and secured debt.

Unsecured debt also what allows you to explore debt-relief options such as debt management, debt consolidation and debt settlement to help you clear your debt faster and for less money.

Credit Card Debt

Credit card debt is the most pervasive type of unsecured debt, and it’s on the rise again. Americans topped $1 trillion on their cards at the start of 2017, the highest it’s been since the Great Recession in 2008. It is a revolving line of credit, meaning you can continue to borrow each month and carry balances over. As with other loans and debts, it’s best to pay more than the minimum payment each month. This is an especially important principle with credit cards because interest rates, which already average 15.3%, can increase to 25-29% or higher if you fail to make payments. Paying more than the minimum will get you out of debt faster and save you hundreds — sometimes, even thousands — of dollars in interest.

Not all credit cards are unsecured. There are secured credit cards, which are backed by an initial deposit. The deposit is equal to the spending limit on the card. Late payments are still reported to credit bureaus, and the bank will keep the deposit if you default.

Learn more about:

  • Credit Card Debt
  • Unable to Pay Credit Card Minimum Payment

Personal Loans

Personal loans (or “signature loans”) can be used for a wide variety of purposes, from funding a start-up business to paying for repairs on your home to taking a vacation. A personal loan typically has a cap and is funded by a bank, credit union or online lending source. Original lending terms depend on your credit history. A good credit score means a lower interest rate and money saved. Most personal loans have lower interest rates than credit cards, making them a more appealing option for planned expenses.

Lenders will typically want to confirm your identity and ability to repay the loan. They will want identification like a driver’s license, Social Security card or passport. They’ll also want to verify your address and income, which might require you to present employment pay stubs, bank statements and tax returns.

Learn more about personal loans

Business Loans

Many businesses use unsecured lines of credit for cash on demand. If an expected expense crops up — especially one that could cripple or ruin a business — a bank credit line can be a lifesaver.

Credit lines are basically pools of cash that business owners can tap when money is short and needs are intense. It is important to understand how a credit line works before it’s needed. Borrowers should understand how quickly they can access the cash, how competitive the interest rates are and whether the line comes with flexible repayment options.

Bank credit lines come in two varieties. Traditional lines of credit offer a fixed amount of available money and often come with check-writing privileges. They can be difficult to obtain and maintain. Following the 2008 recession, many lenders slashed credit lines at a time when businesses needed credit the most. In some cases, banks called in the credit lines early, forcing the borrowers to arrange repayment on short notice.

A better alternative is a non-traditional credit line, typically obtained as a company credit card. Like a traditional credit line, unsecured credit cards allow borrowing up to a limit with far less chance the credit offer will be withdrawn.

Business credit cards often offer:

  • Quick access to cash
  • High credit limits, many with low initial APRs
  • Flexible repayment options
  • Separation of business credit from personal lines, which protects business owners from individual liability in the case of default

Also, keep in mind that businesses have their own credit ratings similar to the credit scores that measure individual consumers. Businesses ratings are usually on a scale of 1-100 and measure credit worthiness of companies and the likelihood they will repay loans.

These credit ratings help determine whether a business will be approved for a loan and the interest rate they will be charged. That is especially important to startup businesses, which rely on loans to help them get on track. A poor credit rating could be disastrous.

Peer to Peer Loans

These are loans that individuals make to one another. Like signature loans, these are usually fixed-rate installment loans. Often, the lender is a family member or close friend, but some websites allow would-be borrowers to post requests. Sites to investigate for this type of loan include Prosper.com and Lending Club.

Private Student Loans

Private student loans are another source of overwhelming debt. Americans carried $108.2 billion in private student loans — or about 7.7% of the $1.4 trillion owed for this type of debt in 2017. According to the Project on Student Debt from the Institute for College Access & Success, members of the 2016 college graduating class left campus with an average of $37,172 in academic debt. Private student loans are similar to personal loans: they are funded by banks or other private lenders, and their terms depend on your credit history. However, as with federally funded loans, private student loans come with perks to allow students the time and resources they need to concentrate on their studies. In general, private student loan payments are deferred until after graduation.

Learn more about private student loans

Medical Debt

Medical bills are a unique form of unsecured debt. While you can choose to make purchases on a credit card and you can choose to fund an education with student loans, no one chooses to fall ill and incur medical bills. Still, 40% of Americans had debt related to illness and a report from the Kauffman Family Foundation said that 25% of Americans say someone in their household is struggling to pay medical debt. An estimated 1.7 million people live in households experiencing bankruptcy because of medical costs and another 64 million Americans struggled to pay medical bills in 2014.

Learn more about medical debt

Apartment Leases

While rent isn’t typically considered debt, when you fall behind on paying it, you actually become indebted to your landlord. If this happens, your landlord is likely to take action in order to evict you unless you find help paying rent. However, since you are not at risk of losing any belongings, your debt is considered unsecured.

Cellphone and Utility Bills

As with unpaid rent, unpaid cellphone and utility bills are unsecured debts. If you are late paying your bills, servicing companies may disconnect your phone or utilities. However, they are not entitled to any of your assets or belongings.

Auto Repossession Overage Balances

If you miss enough payments on your auto loan, your lender likely will repossess your car. The lender then sells the car to recoup what you owed. If your car has lost value faster than you’ve repaid the loan, it’s possible the funds from the sale will not cover the entire amount you owe. The difference, called the auto repossession overage balance, is your responsibility. Since your lender has already confiscated the only asset to which it is entitled, this debt is unsecured.

Short Selling Real Estate

A short sale is one way to market your home if it’s underwater (or worth less than you owe on your mortgage). A mortgage holder may agree to accept the proceeds of a short sale as long as you agree to pay the balance of the debt over time through an unsecured loan. This is called a short sale payoff.

For example, assume you owe $120,000 on property worth $100,000. Your lender may be willing to settle the debt for only $110,000, leaving an unpaid balance of $10,000. You will continue to make payments on the $10,000 balance even after your home is sold.

Lenders are also willing, in some cases, to forgive the unpaid balance. If this is offered — often in markets where real estate values have dropped considerably — remember there may be tax consequences. The IRS can count debt forgiveness as income to the borrower.

A short sale might be a good strategy for a borrower who is current on a mortgage and has a strong credit rating, but there is no guarantee a lender will go along. The lender, after all, is interested in getting the best deal possible, and if that means foreclosing, a short-sale proposal might be rebuffed.

Advantages and Disadvantages of Unsecured Loans

Though unsecured loans aren’t tied to assets like houses and cars that can be seized if the loan isn’t repaid, they are hardly without risk. Failure to pay can severely damage an individual’s or business’ credit rating — commonly measured as a FICO score — making it difficult to obtain credit again for a substantial amount of time.

Unsecured loans offer borrowers a reserve to buy things quickly, or pay off debts that become due, but they often come with high interest rates, and the terms can be tricky. Credit card debt, for instance, allows borrowers to make small minimum payments over long periods of time, but interest rates are usually much higher than those attached to secured loans. Lenders charge the higher rates to compensate for risk – if you default, they can’t take an asset to cover their losses.

For people who pay off debt on schedule, unsecured loans have tremendous advantages. They allow borrowers to improve their credit rating quickly, which can mean bigger credit lines and lower interest rates on revolving debt. If lenders see a good repayment history, they are far more likely to offer more credit at favorable terms.

Unlike home loans, interest paid on unsecured loans isn’t tax deductible. For that reason, many homeowners opt for home equity lines of credit that allow them to borrow against the equity in their homes, often using a cash card. Of course, that isn’t without risk: if a borrower fails to make required payments, the lender can foreclose on the borrower’s home.

Unsecured loans can curtail extra expenses. If you take out a home or car loan, the lender will require that you carry insurance on the asset.

Pros and cons for unsecured loans:

  • Pro: No asset risk
  • Pro: Shorter repayment term (lower cost in interest over time)
  • Con: Harder to obtain from a lender (high risk borrower)
  • Con: Lower borrowing amount allotted
  • Con:Higher interest rate
  • Con: No tax benefit

Unsecured Loan Borrowing Methods

Your mother might not require you to sign papers for a loan, but most institutional lenders will.

Whether you apply for a credit card, a signature loan or a non-collateralized line of credit, you’ll have to sign documents, often with copious fine print. Before you agree to sign, review the terms. For instance, if you see a credit card with a low initial rate, called a teaser, it probably will switch to a much higher interest rate after a fixed period.

Whenever possible, stay current with payments. If you can pay off credit card balances in full each month, do so. In fact, credit cards often come with perks like frequent-flyer miles and cash back rewards, which are free money to those who aren’t saddled with interest payments.

When you apply for an unsecured loan, expect to answer questions about your net worth and income. Also expect the lender to research your credit history. If you have payment problems, loans can be denied, or might come with very high interest rates.

Recently, many credit card companies and financial web sites have made it easy for customers to check their FICO credit-worthiness scores. FICO scores can also be purchased from the nation’s 3 large credit rating agencies. It’s always a good idea to know your FICO score in advance, as a high one will allow you to insist on favorable terms and a low one might require extra documentation.

You might also consider steps for improving your credit score, which almost always involves paying down debt in timely installments.

Failure to Repay a Loan

Unlike a secured loan, where the collateral is stipulated, unsecured loans are problematic.

If a borrower fails to repay, the consequences can range from frequent calls from collection agencies to lawsuits. The lender of a delinquent or defaulted loan will report the borrower to the nation’s 3 credit report reporting agencies, which in turn will severely lower the borrower’s credit-worthiness quotient, known as the FICO score. A low FICO score makes it more difficult to obtain credit. This also makes borrowing any possible credit costlier.

Employers also use credit scores in hiring decisions, concerned that a poor credit history reflects a lack of character. Failure to repay a debt can remain on a credit report for as long as seven years.

Court Judgements and Tax Debt

Unsecured debt isn’t backed by any property, but a lender can try to reclaim their money in the court system. They can pursue a court judgement through a debt collection lawsuit. The borrower is summoned to court, where failure to show up grants the decision in favor of the lender. State statutes commonly stipulate how long a creditor has to file a collection suit after repayment terms are violated.

If the lender is successful in court, they receive a judgement, which legally entitles them to the money owed. They can collect their due using alternative methods including garnishing wages, seizing property and freezing bank accounts.

Borrowers still have options after a court judgement. They can appeal the decision, discharge the debt through bankruptcy or more commonly settle the debt.

Taxes are not considered unsecured debts. They’re in a class of their own, and the penalties for failing to pay taxes are severe. For starters, there are late fees and interest compounded daily. If the situation goes unresolved, the government can file a claim against property (Federal tax lien), seize property and assets (Federal tax levy), take part or all of a tax refund and garnish wages. The government can do all of this without a court judgement, and taxes cannot be discharged through bankruptcy. It’s best to tackle the issue early, and set up a repayment plan with the IRS.

Settling Unsecured Debt

Any unsecured debt may be eligible for settlement, a debt-reduction strategy aimed at reducing the total amount you owe. It is a useful strategy for individuals who find themselves with more debt than they can handle and want to get their finances back on track. It often is done with the help of a debt settlement specialist, who can speak to your creditors on your behalf and often negotiate reduced balances.

If you are saddled with more debt than you can handle, a debt consolidation plan might be the way out. Debt consolidation allows you to combine several unsecured debts into a single loan and single payment that satisfies all your creditors. It may also lower your interest rate and monthly payments. It is often done with the help of a credit-counseling agency which can speak to creditors on your behalf and often arrange for lower interest rates. To get an initial idea of what it will take, try using a Debt.org’s loan consolidation calculator.

Priority vs Non-Priority Debt

Bankruptcy could be the best option in cases of extreme financial hardship, and not all debts are treated equal in this process. The priority and non-priority titles indicate the order in which the trustee disburses money from the estate to creditors.

Priority debts are taxes, alimony, child support and criminal fines. These get paid first and can’t be discharged through bankruptcy, which means you’re still on the hook for them after bankruptcy.

Non-priority debts are credit-card balances, personal loans, utilities, medical bills and student loans. These are paid with whatever money is left over after the priority debts are taken care of. If there’s no money left, most non-priority debts are discharged and go unpaid Student loans are rarely discharged in bankruptcy and need a separate lawsuit.

Unsecured Debt – Types and Solutions (2024)


What type of debt is unsecured? ›

Understanding Unsecured Debt

A loan is unsecured if it is not backed by any underlying assets. Examples of unsecured debt include credit cards, medical bills, utility bills, and other instances in which credit was given without any collateral requirement.

How do you resolve unsecured debt? ›

Settling Unsecured Debt

It often is done with the help of a debt settlement specialist, who can speak to your creditors on your behalf and often negotiate reduced balances. If you are saddled with more debt than you can handle, a debt consolidation plan might be the way out.

How do I get rid of $30 K in credit card debt? ›

How to Get Rid of $30k in Credit Card Debt
  1. Make a list of all your credit card debts.
  2. Make a budget.
  3. Create a strategy to pay down debt.
  4. Pay more than your minimum payment whenever possible.
  5. Set goals and timeline for repayment.
  6. Consolidate your debt.
  7. Implement a debt management plan.
Aug 4, 2023

Which of the following is an example of an unsecured debt group of answer choices? ›

Credit cards and most personal loans are among the most common types of unsecured debt. Although lenders typically charge higher interest rates on these types of debt, there are ways to get around this.

What are examples of unsecured loans? ›

Student loans, personal loans and credit cards are all example of unsecured loans. Since there's no collateral, financial institutions give out unsecured loans based in large part on your credit score and history of repaying past debts.

What are two examples of unsecured loans? ›

Unsecured loans include personal loans, student loans, and most credit cards—all of which can be revolving or term loans. A revolving loan is a loan that has a credit limit that can be spent, repaid, and spent again. Examples of revolving unsecured loans include credit cards and personal lines of credit.

Can you be forced to pay unsecured debt? ›

Defaulting on an Unsecured Loan

As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order. 5 And, as with a secured loan, you can expect a serious impact on your credit score.

How long before unsecured debt is written off? ›

For most debts, the time limit is 6 years since you last wrote to them or made a payment. The time limit is longer for mortgage debts.

Can unsecured loans be forgiven? ›

In fact, it's rare for any types of debt (other than federal student loans) to be forgiven. Under certain circ*mstances, you may be able to settle your personal loans for less than you owe, but this is typically only done in the case of delinquent loans and happens through third-party debt settlement companies.

How long will it take to pay off $20000 in credit card debt? ›

It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.

How long will it take to pay off $25 000 in debt? ›

$25,000 at 20%: Your minimum payment would be $666.67 per month and it would take 437 months to pay off $25,000 at 20% interest. You would pay $41,056.85 in interest over the life of the debt.

How can I pay off $40000 in debt fast? ›

To pay off $40,000 in credit card debt within 36 months, you will need to pay $1,449 per month, assuming an APR of 18%. You would incur $12,154 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.

What happens if you can't pay unsecured debt? ›

If you don't pay an unsecured business loan, you risk damaging your credit score and reputation among lenders. Lenders can also impose late fees and penalties, adding to the amount owed. Ultimately, failing to pay the debt can lead to creditors taking legal action against you or your business.

Which type of debt is most often unsecured? ›

Personal loans, credit cards and student loans are all examples of common types of debt that are unsecured. Since there is no asset that the lender can seize if you default, unsecured debt is often thought of as less risky for the borrower than secured debt.

Which type of credit is most likely to be unsecured? ›

Most credit cards are unsecured. The card issuer (typically a bank or credit union) does limit the amount you can spend with the card, but unlike secured cards, there is no deposit required beforehand.

How do you know if a debt is secured or unsecured? ›

Key takeaways
  1. Secured debt is backed by collateral. ...
  2. Examples of secured debt include mortgages, auto loans and secured credit cards.
  3. Unsecured debt doesn't require collateral. ...
  4. Examples of unsecured debt include student loans, personal loans and traditional credit cards.

Is a bond an unsecured debt? ›

Bonds are types of debt instruments that are issued by a large corporate or a government agency with the goal of raising funds of capital. Irrespective of whom it is issued by a bond falls into two broad categories. It is either secured or unsecured in nature.

Is my debt secured or unsecured? ›

Secured loans require some sort of collateral, such as a car, a home, or another valuable asset, that the lender can seize if the borrower defaults on the loan. Unsecured loans require no collateral but do require that the borrower be sufficiently creditworthy in the lender's eyes.

Is credit card debt secured or unsecured? ›

Credit card debt is by far the most common type of unsecured debt. If you fail to make credit card payments, the card issuer cannot repossess the items you purchased.

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