Unsecured Debt Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Unsecured Debt, written in plain English, along with examples of how it is used.

What is Unsecured Debt?

Debts that the value of a tangible asset does not back.

History and Meaning of Unsecured Debt

Unsecured debt refers to a type of loan or credit where the borrower does not pledge any asset or collateral as security for the debt. The lender, therefore, only relies on the borrower's creditworthiness and ability to repay the loan. In the event of default, the lender cannot directly seize any of the borrower's assets but can take legal action to recover the funds.

Unsecured debt has been around for centuries, with early forms of borrowing and lending involving verbal agreements or written IOUs. Today, unsecured loans are commonly offered by banks, credit unions, and other financial institutions to individuals and businesses.

Examples of Unsecured Debt

  1. Credit card debt: This is one of the most common forms of unsecured debt. The borrower can use the credit card to make purchases or withdrawals up to a certain limit, and are only required to pay back the amount borrowed plus interest.

  2. Personal loans: These are unsecured loans offered by financial institutions for various purposes, such as debt consolidation or home improvement. Since there is no collateral to secure the loan, the lender may charge higher interest rates to offset the risk.

  3. Medical bills: Medical expenses can quickly rack up and may represent an unsecured debt if the patient cannot afford to pay out of pocket and uses a payment plan or applies for a medical loan.

  4. Student loans: Although many student loans are guaranteed by the government, some private student loans may be unsecured and granted only based on the borrower’s creditworthiness.

  5. Payday loans: These loans are a type of short-term unsecured debt where the borrower writes a post-dated check that covers the loan amount plus fees and interest, and the lender provides the funds upfront.

Legal Terms Similar to Unsecured Debt

  1. Secured debt: This refers to a loan or credit agreement where the borrower pledges an asset as collateral, such as a car or a home mortgage.

  2. Judgment debt: This refers to a court order that determines the amount of money that a debtor owes to a creditor, which can be secured or unsecured.

  3. Default: This refers to the failure of a borrower to repay a loan or meet the terms of a credit agreement, which may result in legal action or collection efforts by the lender.