Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Unsecured Debt

What it is:

Unsecured debt is debt that does not have any collateral attached.

How it works (Example):

If you borrow money from XYZ Bank, XYZ Bank becomes your creditor. Utility companies, health clubs, phone companies and credit card issuers can all be creditors if you have contracts with them or if they have performed services for which you have not yet paid.

If the creditor has claim to some of your assets – say, a deposit you made, a lien on your house, the title to your car – that creditor is a secured creditor. If the creditor has no ability to claim some of your assets when you don’t pay (this is often the case with credit cards), the debt to the creditor is unsecured. If you have borrowed money from a bank, the bank may ask you for collateral as a way of securing the loan.

Why it Matters:

Unsecured debt is riskier than secured debt because the creditor does not have the ability to seize an asset right away if a borrower fails to repay the debt. Creditors may of course sue to obtain access to accounts or other assets if the borrower has not paid, but that is more expensive than requiring collateral up front.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...