Unsecured debt

In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment.

In the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors, although the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors.

In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able (and in some jurisdictions, required) to set-off the debts, which actually puts the unsecured creditor with a matured liability to the debtor in a pre-preferential position.

Examples

Unsecured loans^[1]

Also called signature loans or personal loans. These loans are often used by borrowers for small purchases such as computers, home improvements, vacations or unexpected expenses.

An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short-term loan (one to five years).^[2]

In the UK there are hundreds of different unsecured loans to choose from, so comparison tables have become a popular way of finding out about the different options available. In 2006, according to the Bank of England, 22% of UK households had some unsecured debt with a further 21% having both secured and unsecured debt.^[3]

Credit cards^[1]

Medical bills^[1]

See also

• High-yield debt

References