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What Is Unsecured Debt?

Learn about unsecured debt in this Howcast finance video with expert Gregory McGraime.

Transcript

Unsecured debt really refers to money that you've borrowed and where there's no collateral in the event that you don't make your payments. So for example, a credit card is an example of unsecured debt. You know, if I go out and I charge dinner at a restaurant or I buy some things at a store and I don't make my payment, the credit card company is not going to come collect on that. There's nothing for them to seize in the event that I don't make my payment. Another example of unsecured debt might be a student loan. I have a student loan and I don't make my payment, again, there's no collateral there for the loan.

In contrast, secured debt is where there is collateral. An example of secured debt would be a mortgage, where if I don't make my mortgage payment, the bank of the lender can foreclose on my property. Or car loans, if I don't make my car payment, the car can be repossessed. In general, the biggest form of unsecured debt that people have is credit cards.

And when you're dealing with unsecured debt, usually the interest rate is a lot higher because there's a lot more risk to the lender. If I don't make my credit card payment, no one can come take my home. But there is a lot of risk, and as a result, the lenders are charging you more interest to compensate for that risk.

And so you want to be aware, as you're reviewing your overall debt situation, separate your debt out. What type of debt is secured debt and what's unsecured debt? What are the actual interest rates? And often, on the unsecured debt, you'll find the interest rates are much higher, and sometimes that's the debt that you should target paying down first to try and make as much progress as you can.

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