Examples of unsecured debt and how they work

Every financially savvy person started exactly where you are right now—curious and ready to learn. Learning how debt works is easy when you break things down into smaller ideas. In fact, that’s a smarter way to learn, because you can focus on mastering one idea at a time. If you understand how different types of debt work, you can plan better money moves that improve your financial life for the long haul.

We’ll walk you through different examples of unsecured debt and how they work.

Unsecured debt overview

In the personal finance world, debt comes in two forms: secured or unsecured. Unsecured debt is any type of debt that isn’t attached to collateral. Collateral is something of value that you own and that your lender can take if you don’t repay the debt. If you don’t repay your car loan, for example, your lender could take your car and sell it to recover the money you owe. 

With an unsecured debt, the lender has no fall-back option if you don’t repay them. And that changes how unsecured debts work. It might be quicker to apply for an unsecured loan, for example, since the lender doesn’t have to check the value of any collateral. But you might pay higher rates, too, since that lender is taking on more risk if they approve the loan. 

Let’s look at some of the other differences with specific examples of unsecured debts. 

Common examples of unsecured debt

Most people take on unsecured debt at some time or another. Unsecured debts all share common features, but specific examples of unsecured debt might work a little differently. 

1. Credit cards

You can use a credit card to borrow money now and pay it back later. Your credit card issuer gives the money to the business you bought from and then sends you a bill to pay. You only have to make a minimum payment, even if it’s less than the full amount you owe. If you pay less than the entire balance, the creditor will charge interest on the money you owe. 

Credit cards generally carry high interest rates that could also change on a regular basis. It could take a long time to pay off a credit card if you only make the minimum payment your lender requires.  

2. Personal loans

Sometimes you need to borrow a larger sum of money all at once. For example, if you’re consolidating debt or buying a new home appliance. A personal loan lets you do just that. If you’re approved, you can use your personal loan for just about any purpose. You’ll make monthly payments for a pre-set period of time. Often, that’s two to five years. 

3. Student loans

Many people who go to college need to borrow money to pay their tuition and living costs, and that’s what student loan debt is for. Students can get loans from private lenders or the federal government. Federal student loans come with more benefits and options for help repaying the loan. Federal student loan borrowers generally don’t owe any payments until after they’ve graduated.

4. Medical debt

Medical debt is one of the most common types of debt in the country. If you owe money to a doctor or hospital, you have medical debt. Medical debt can be challenging. Healthcare can be expensive and, and most of us wouldn’t want to turn away treatment when we need it. But there are lots of options to manage medical debt. Even if you find yourself struggling to keep up financially, medical debt doesn’t impact your credit standing in the same way as other types of debt.

5. Lines of credit

An unsecured personal line of credit is similar to a credit card. It’s usually meant more for borrowing larger amounts of cash on a regular basis rather than for making a single purchase at a grocery store, for example. Some lenders offer unsecured lines of credit, but they’re not as common as other examples of unsecured debt. 

6. Buy Now, Pay Later (BNPL) loans

Buy now, pay later loans are becoming more and more popular. You often see BNPL loans in online shopping, sometimes as an option within your digital shopping cart. A BNPL loan works by paying for specific purchases you want to make, then splitting the cost into a series of payments (usually four). Most BNPL loans don’t charge interest. The danger with BNPL is that it’s possible to accidentally borrow too much since they’re so easy to get. 

Pros and cons of unsecured debt

Pros

• Usually quicker to get

• Less risk of losing personal property if you don’t repay

• Could be easier to deal with in bankruptcy or debt resolution

Cons

• Higher interest rates

• Lower borrowing limits

• Higher income and credit requirements

What’s next

• Learn how other types of debt work.

• Check whether your own debts are secured or unsecured.