Several types of lending are available when borrowing money, and one type of loan is an unsecured debt. Any debt that isn’t tied to an asset is unsecured—meaning that something valuable, like your car, home, or a savings account, cannot be used by a lender to recover their money if you are unable to repay it. Since unsecured debt offers no security for repayment, it’s considered riskier for lenders. It can be less stressful for borrowers, however, since they don’t stand to lose important assets.
Unsecured debt is common in many forms, including business loans, medical debt, apartment leases, and utility and cell phone bills. Three of the most widespread types are credit card debt, personal loans, and student loans.
By far the most common form of unsecured debt, a credit card allows you to borrow money up to a predetermined limit. Credit cards offer a revolving line of credit, which means that any borrowed money is restored to your credit limit as you pay it back—like a revolving door. By paying your credit card balance in full each month, you’ll avoid paying interest charges; otherwise, you’ll pay interest and the balance will roll over into the next month’s billing. Not all credit cards are unsecured, but most do not require collateral. Instead, the loan offer and terms are based on your credit history and score, which are negatively impacted if you fail to make timely payments or default on the loan.
Unsecured personal loans are usually obtained through your bank or credit union. These are also sometimes referred to “signature loans”, because if you have a good credit history and an existing account with the financial institution, a signature is usually the only requirement to get one. The terms for a personal loan depend on your credit score, with a high score typically resulting in a lower interest rate. Personal loans also tend to have lower interest rates than credit cards, so they can be appealing if you qualify.
Another widespread form of unsecured debt, student loan debt totaled $1.68 trillion in the United States in 2020. There are two types of student loans—personal and federal—but most come with benefits for students, like lower interest rates and deferred payments until after graduation.
Unsecured loans may offer less security for lenders, but they do provide major benefits for borrowers who pay their debt on time:
The disadvantages of unsecured debt may be minimal for those with a healthy credit score and history, but there is always a degree of risk involved when borrowing money. Potential drawbacks of unsecured loans include:
If your unsecured loan becomes unmanageable, talking to your lender should be your first step—Kredit can help you connect. Some options you should discuss together include:
Unsecured debt has both advantages and disadvantages, making it important to carefully evaluate your borrowing options. Read more about secured debt to discover other types of loans that could be right for you.