What is Unsecured Debt?
A loan not secured by an underlying asset or collateral. Unsecured debt is the opposite of secured debt. Read more for examples and further explanation including related video clips and also comments
Example explains Unsecured Debt
The concept of unsecured debt is easily understood when its opposite is considered. A good example of secured debt would be a mortgage. The bank loans out money to a lender who uses it to buy a house; the house becomes the asset backing the loan.
In the case of unsecured debt, a lender loans money without the security that an underlying asset provides. For this reason, unsecured debt carries more risk for the lender, which in turn makes the loan more expensive. The more additional risk that a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher rates.
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