If you buy a house or a car, the lender has an obvious recourse if you do not pay: taking the house or car from you. Such debts are called "secured," because they are backed by underlying collateral. Unsecured debts are the opposite. The creditor is making the loan based on your good word, your credit rating, your income and other factors. Because of the higher risk involved for the lender, you are likely to pay a higher interest rate for an unsecured loan.
Types
Credit cards get plenty of attention as a type of unsecured consumer debt, but other kinds are also available. They include student loans, medical debts and, if your credit is good enough, personal bank loans. Unsecured credit is an important source of capital for businesses, too, in the form of "revolving credit facilities."
Solutions
Paying the minimum balance on unsecured debt such as a credit card usually means you are paying 2 to 4 percent of the monthly balance each month. At that rate, you may never get it paid off--but the credit card company will make plenty of money in interest. So, pay as much as you can each month. If you have multiple unsecured debts, pay as much as you can on the higher-interest debts first while paying the minimums on the others. It also cannot hurt to call your creditors and ask for a lower interest rate.
Warning
A common strategy for people struggling to pay unsecured debts is a loan through a debt consolidation firm. Such companies market the loans as a way to save on interest and fold the payments into one convenient monthly bill, according to Dave Ramsey, host of a national radio program on personal finance. The loans tend to extend the length of time you have to pay back your debts--meaning you are likely to end up paying more in the long run, even if the interest rate is a bit lower. Your underlying bad habits of spending too much and saving too little, meanwhile, remain unchanged, so you are apt to continue adding to your debt load.
Scope
U.S. consumers have an appetite for loans: U.S. revolving debt--meaning debt that does not have to be paid off in a set amount of time or number of installments--totaled $864.4 billion as of January 2010. Of that debt, 98 percent was credit card debt. At the end of 2009, more than 576 million credit cards were in circulation in the United States.
Trend
Long overlooked in favor of credit cards and home equity lines, personal loans from banks may be coming back into vogue, according to personal finance magazine Smart Money. The credit crunch and the crashing real estate market wiped out the credit lines many consumers were used to relying on, the magazine wrote in December 2009. Though still a "niche market," the loans can suit people with good credit and a regular income. Their amounts can run from $1,000 to $100,000, with interests rates ranging from 8.5 to 26.25 percent.
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