Unsecured debt

Debt offering backed only by the creditworthiness and reputation of the issuer, and not supported by Collateral. See also Commercial Paper; Debenture; Note; Subordinated Debt.

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A loan not secured by an underlying asset or collateral. Unsecured debt is the opposite of secured debt.

Investopedia Says:
The concept of unsecured debt is easily understood when its opposite is considered. A good example of secured debt would be a mortgage. The bank loans out money to a lender who uses it to buy a house; the house becomes the asset backing the loan.

In the case of unsecured debt, a lender loans money without the security that an underlying asset provides. For this reason, unsecured debt carries more risk for the lender, which in turn makes the loan more expensive. The more additional risk that a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher rates.

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Securities

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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 the borrower's promise to pay it back. Due to the increased risk involved, interest rates for unsecured loans tend to be higher. Typically, the balance of the loan is distributed evenly across a fixed number of payments; penalties may be assessed if the loan is paid off early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if the lender wants 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

1. ^ ^{a b c} http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtml
2. ^ http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/CreditAndStoreCardsCreditAndLoans/DG_10035249
3. ^ http://www.bankofengland.co.uk/publications/quarterlybulletin/qb060403.pdf

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