While a debt is a financial responsibility and must be paid, there are several different kinds of debt. A debt may be a monthly utility bill, a credit card bill, a monthly payment on a loan, or any of a wide variety of ways in which an individual may owe another person or institution money, but the two types heard most often are secured debt and unsecured debt.
Identification
Unsecured debt is most easily defined in comparison to its opposite, secured debt. Secured debt is a loan for which there is an asset to secure the loan, such as a mortgage. Unsecured debt is precisely the opposite, where no asset exists to secure the debt. This type of loan is given with no form of collateral, or asset, which the person or institution lending could collect on if the debt is not paid.
Risk
Unsecured debt is considered to be a much higher risk for lenders than secured debt, due to the lack of collateral that is found in secured loans. For this reason, it can be more difficult to obtain this type of loan, because lenders must be more careful when there is nothing for them to collect on in the case of defaulting on payments.
Expense
An unsecured loan typically carries a higher rate of interest than a secured loan, which is associated with the higher risk in granting the loan. The riskier the lender feels the loan to be, the higher the fees will be to obtain it. This loan is subject to higher interest rates to account for the greater risk that lenders take in issuing it.
Examples
Examples of unsecured debt would include medical bills, student loans, credit cards and store credit cards, all cases in which there is nothing easily collected as default payment on unpaid bills.
Securing
If undertaking a debt consolidation initiative, it may be a good idea to look into securing unsecured loans. When a loan is unsecured, and a person fails to make the payment, creditors may collect on it through a variety of different assets. If a person takes steps to secure the unsecured debt, or offers a particular asset as collateral on it, he can choose what the creditor can go after if he defaults on his payments. Lenders may also offer lower rates on the loan if they know that there is property put up as surety against it.
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