What Does Unsecured Debt Mean?

And unsecured debt is not secured by an asset as collateral. Mortgages are considered secured debts because the home acts as collateral, and personal loans and debts are typically unsecured.

Function

The securing of a debt serves as a way to guarantee a lender something of value, even if the borrower fails to make payments or goes bankrupt. Secured debt is common for large loans like mortgages, which present a large financial risk to the lender. Unsecured debts often have higher interest rates because lenders are not necessarily granted the opportunity to take control of assets if the borrower doesn't pay.

Types

Many common types of debt are unsecured debts. Credit card debt, student loan debt, medical debt and many other personal loans are typically unsecured.

Benefits

Unsecured debts are beneficial to consumers in that they allow borrowing without having to offer up anything valuable as collateral, which could be difficult for those with few assets.

Drawbacks

Unsecured debts cannot be cast off by giving up the asset offered up as collateral as secured debts can. For instance, a homeowner might decide that her home is not worth paying for and stop paying the mortgage, allowing the lender to take ownership of the home. After the lender takes over the collateral asset of a secured debt, the borrower is free from the debt.

References

• FTC: Facts for Consumers
• TheFreeDictionary: Unsecured Debt