June 1, 2021
Types of unsecured debt
“In an economic climate where jobs and pay rises can be elusive, money is often tight. ”
Many families find themselves resorting to borrowing to find a temporary fix to meet everyday living costs or to pay for unexpected bills.
Types of unsecured debt
What is unsecured debt?
Unsecured debt is a debt that is not tied to a physical asset.
The main advantage of unsecured debt is that the borrower does not risk losing a valuable asset (such as their home) if they can’t repay the money they owe.
Unsecured debt also allows you to look at debt-relief options such as debt consolidation, debt management plans, and debt settlement that will help you to clear your debt quickly and cheaply.
Types of unsecured debt
Unsecured debt comes in many different forms; let’s look at some of the most common ones:
Credit card debt
The most common form of unsecured debt is credit card debt.
Credit card debt is a revolving line of credit. That means you continue to borrow more money each month, carrying the balance over and accruing more interest on top. Many people with unsecured credit card debt only pay the minimum repayment required each month, rather than the full balance, leading to more interest and even more debt!
Some credit cards can be “secured.” That means they’re backed by an initial deposit, which is equal to the spending limit on the credit card. If you default on payment, the card issuer keeps your deposit.
Unsecured personal loans typically have a “cap” that’s dependent on your income and on your ability to make the repayments. Unsecured personal loans are funded by a credit union, bank, or another lending source.
Provided you have a good credit score; you’ll enjoy a lower interest rate on an unsecured loan than you would on a credit card.
If you run your own business, you may use unsecured debt from time-to-time to meet emergency expenses that could otherwise adversely affect the running of your business.
Business credit lines are essentially pools of cash that can be used by business owners when money is short, and needs are urgent.
Credit lines can also come in the form of unsecured company credit cards.
Peer-to-peer loans are unsecured loans that are made from one individual to another, generally between family members and friends.
If you’ve invested time in attending university, you may have taken out an unsecured student loan to finance your studies.
Academic debt is a form of unsecured debt. Once you’ve finished your education and you move into employment, you’ll be required to take steps to repay the debt eventually.
Although the rent you pay for a property is not typically regarded as debt, if you fall behind on paying it, you do become indebted to your landlord.
However, as you are not at risk of losing any assets, the debt is considered unsecured.
Mobile phone contracts
The contract that you have with your mobile phone service provider is a form of credit agreement.
If you fail to keep up repayments for your phone, you will incur a debt to the service provider. The phone company cannot seize any of your assets to recoup the debt; they will merely disconnect your service.
What are the pros and cons of unsecured loans?
Defaulting on an unsecured debt won’t result in the loss of assets, but such credit arrangements still carry an element of risk that offsets their advantages.
What happens if you don’t repay an unsecured debt?If you can’t repay an unsecured debt, you will be pursued by your creditors. That means letters, phone calls, text messages, and even visits from debt recovery companies.
The lender of a defaulted loan or other unsecured debt will report you to the UK’s credit report reporting agencies. A poor credit score will make it difficult for you to obtain credit, and you will pay more for any borrowing that you do manage to secure.
You should also note that many employers use credit scores in their hiring decisions. If you have a poor credit history, you could be overlooked for a job. A defaulted debt can remain on your credit report for as long as seven years.
Ultimately, you may be taken to court by the lender, leaving you with a County Court Judgement on your credit file. If the lender successfully sues you through the courts for the recovery of the debt, the judgment they are awarded will legally entitle them to recoup the money they’re owed. The debt may be recovered via freezing your bank account, seizing your property, or garnishing your wages.
On the plus side, unsecured debt:
- presents no risk to your assets
- allows you to obtain relatively small amounts of cash when you need it
- allows you to make manageable payments over a long period
- allows borrowers to improve their credit rating quickly, making it easier to obtain favourable credit terms in the future
But unsecured debt does have disadvantages, including:
- you’ll pay a higher interest rate on some forms of unsecured borrowing
- you’re viewed as a high-risk borrower, so it can be more difficult to obtain a loan
- because you have no assets against which to offset the debt, the amount you can borrow is quite low
Although taking on unsecured debt can appear to be a “safe” way of borrowing small amounts of money to see you through an immediate financial crisis, there are still risks attached.
If you find yourself in financial difficulty, or you’re struggling to pay off unsecured debt, always discuss your situation with an experienced, qualified debt advisor.
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