People get into debt for a number of reasons. Moreover, not all debts are created equal and different types of debts are regarded distinctively. Understanding these differences is important so you can identify the best approach towards dealing with them appropriately.
There are two main classes of debts – secured debts and unsecured debts.
What are Unsecured Debts?
Unsecured debt refers to a type of debt that isn’t tied to any collateral; for instance a home or a car. Unlike secured debts, no item or asset is pledged by the borrower as a collateral for a borrowed amount.
The collateral serves as the lender’s guarantee that the borrower will pay the debt, otherwise the lender can retrieve the collateral as a way of recouping from the loss caused by the unresolved debt.
However, even without collateral, it doesn’t mean that creditors won’t have a way to get a hold of an unsecured debt so they can pay their obligation. In most cases, the lenders can sue the borrower for the unpaid debt.
Types of Unsecured Debts
The common types of unsecured debts include:
As the name implies, student loans are offered to students so they can have the resources needed to finance their studies. When it comes to student loans, repayment typically starts after a student graduates.
Medical debt can stem from an unexpected accident or illness. They can accumulate quickly – and as much as 40% of Americans have debt troubles related to medical bills.
Credit Card Debts
One of the most prevalent types of unsecured debt is credit card debt. With more than $1 trillion total credit card debt as of 2017, Americans have hit a record-high level when it comes to credit cards.
A credit card allows borrowers to make purchases that they can pay at a later time. But this also carries one of the highest interest rates in the industry. Aside from that, credit card debt is crucial when determining an individual’s credit score profile. As a general rule, borrowers must pay off their balances monthly to reduce the interest rates they have to pay and simultaneously achieve a higher credit score.
Also known as a signature loan, a borrower may apply for an unsecured personal loan for many different reasons – to start up a business, to finance home repairs, or take a vacation. This type of loan can be funded by a bank, online lending company, or credit union.
Other types of unsecured debts:
- Apartment leases
- Cell phone bills
- Telephone bills
- Utility bills
How to Settle Unsecured Debts
With no asset risk and shorter repayment terms, unsecured debts can be beneficial for borrowers who want to make quick purchases or to serve other personal reasons. Failure to pay unsecured debts can come with serious consequences. For example, your creditor can file a lawsuit against you and it can severely impact your credit score if you get too far behind on your debt.
Borrowers struggling to pay their unsecured debts can opt for a debt settlement or debt consolidation plan to reduce the interest rate and ultimately pay off the debt faster.