What Is Unsecured Debt? Definition and Examples
- Unsecured debt is money you borrow without pledging an asset (like a house or car) as collateral. As a result, unsecured debt often comes with higher interest rates.
- Examples of unsecured debt include credit cards, personal loans and student loans.
- It’s crucial to manage debt responsibly, as missed payments can hurt your credit and lead to collections or even legal action.
- If your debt feels overwhelming, you have options, including debt consolidation, credit counseling and bankruptcy. The right choice for you depends on your unique financial circumstances.
Debt generally falls into two categories: secured and unsecured.
Secured debt requires collateral, while unsecured debt doesn’t. This means lenders rely more on your credit to approve an unsecured loan. Some common examples of unsecured debt are credit cards, personal loans, student loans and medical bills.
Because there’s no asset backing up an unsecured loan, it often comes with higher interest rates. Understanding unsecured debt helps you know how it might impact your finances.
What is unsecured debt?
Unsecured debt is a type of loan or credit that isn’t backed by collateral, meaning you don’t have to pledge an asset, like your car or home, for approval. Instead, lenders decide whether to approve the loan based on your credit history, income and overall financial profile.
Some common examples of unsecured debt include:
Because there’s no asset for lenders to claim if you fail to repay, unsecured debt usually comes with higher interest rates than secured loans. Americans pay an average of $1,025 per month toward unsecured debt, including personal loans ($475), credit cards ($273) and student loans ($277), according to a LendingTree survey.
Unsecured debt can be a good fit if you need flexible access to funds without tying up assets. For example, you might use it to consolidate other high-interest debts or cover emergency expenses. Approval often depends on having good credit, reliable income and a manageable debt-to-income ratio.
If you default on the debt, lenders can’t immediately seize property, but they can send the account to collections, report missed payments to the credit bureaus and even pursue legal action. All of these consequences can seriously damage your credit score.
Buy now, pay later (BNPL) is a type of unsecured debt. It’s become a popular way for shoppers to split purchases into smaller, interest-free installments. In fact, 49% of respondents in a LendingTree survey have used BNPL, showing how quickly this unsecured debt option is reshaping consumer finances.
But BNPL comes with a caveat: Reporting to credit bureaus is inconsistent. While some BNPL providers share payment history, most only report in limited ways or not at all. This inconsistency makes it harder to build credit.
Unsecured debt vs. secured debt
Understanding the difference between unsecured and secured debt helps you make smarter borrowing decisions. Both provide access to credit, but they have different requirements, risks and costs. Here’s how they compare:
| Unsecured debt | Secured debt | |
|---|---|---|
| Collateral required | No | Yes |
| Examples | Credit cards Personal loans BNPL Medical bills Student loans | Mortgages Car loans Secured credit cards Equipment loans |
| Interest rates | Higher | Lower |
| Lending requirements | Good credit score Stable income Manageable debt-to-income ratio | Ability to provide collateral |
| Defaulting on your debt | Debt sent to collections Missed payments reported to credit bureaus Potential legal action | Repossession Foreclosure |
What happens if you don’t pay unsecured debt?
Failing to pay unsecured debt won’t put your assets directly at risk, but it can trigger a series of serious financial consequences. Here’s what you can expect if you miss payments:
- Late payments will impact your credit score. When you miss a payment, your lender may report it to the credit bureau, usually once it’s 30 days late. Even one late payment can lower your credit score. That negative mark remains on your credit report for up to seven years, making it harder to qualify for new credit.
- You may pay late fees. Most lenders charge a fee for missed payments.This may be a flat fee or a percentage of the outstanding balance. These fees can add up quickly, increasing the overall balance you owe and making it more difficult to catch up.
- Your debt may be sent to collections. If payments remain unpaid, often after six months, lenders may transfer or sell your account to a collection agency. This further damages your credit, and you may receive persistent calls and letters from the collection agency.
- Your lender may file a lawsuit against you. In some cases, creditors take legal action to recover unpaid balances. If they win in court, you may face a judgment requiring you to pay the debt in full plus legal costs. Additionally, the court could put a lien on your home to force you to pay what you owe, which indirectly puts your assets at risk if you stop making unsecured loan payments.
- You may be subject to wage garnishment. A court judgment may allow creditors to garnish your wages, meaning the court requires your employer to withhold money from your paycheck to repay the debt. Garnishments reduce your take-home income and can make it harder to cover everyday expenses.
Medical debt is a common form of unsecured debt.
In early 2025, the Consumer Financial Protection Bureau (CFPB) finalized a rule to remove around $49 billion in medical bills from the credit reports of approximately 15 million Americans and bar lenders from using them in credit decisions.
However, that rule was overturned by a federal court in July 2025, meaning medical debt can once again appear on your credit report and affect lending decisions.
Can’t afford your unsecured debt? How to get rid of it
Lenders and financial experts generally recommend keeping your debt-to-income (DTI) ratio below 36% to keep your payments manageable. If yours is significantly higher, you may need to explore strategies to reduce what you owe. Here are a few to consider.
Debt payoff strategies
Popular debt payoff strategies include the debt avalanche (paying off debts with the highest interest rates first) and the debt snowball (paying off the smallest balances first). These strategies require discipline, but can help you save money on interest or provide quick psychological wins to keep you motivated.
Outcome: These approaches won’t harm your credit score, and as your balances decrease, your credit score should improve. However, progress may be slow if your balances or interest rates are very high.
Debt consolidation
Debt consolidation combines multiple debts into a single loan, usually with a lower interest rate or more manageable monthly payment. Consolidation can simplify repayment and save you money over time.
Outcome: Consolidation may cause a temporary dip in your credit due to a new credit inquiry, but paying on time can help your score recover. Watch out for fees or high interest rates on the new loan, as these can negate savings if you don’t qualify for favorable terms.
Balance transfer credit card
A balance transfer credit card allows you to move existing credit card balances to a new card with a low or 0% introductory annual percentage rate (APR). This gives you more time to pay down debt without accruing interest. Drawbacks include balance transfer fees and the potential for high interest rates if you don’t pay off the balance before the promotional period ends.
Outcome: A balance transfer card can reduce interest costs, but failing to pay off the transferred balance during the promotional period can mean you are ultimately hit with high interest rates. The hard inquiry when you apply may temporarily lower your credit score.
Credit counseling
Credit counseling involves working with a nonprofit agency to review your finances and create a repayment plan. Many agencies also offer debt management plans (DMPs), which may lower interest rates or consolidate payments into one monthly bill. Find a reputable credit counselor through the National Foundation for Credit Counseling (NFCC).
Outcome: Enrolling in a DMP may show up on your credit report, and some creditors may restrict access to new credit. Still, consistently repaying on the plan can improve your credit score over time and help you avoid default.
Debt settlement
With debt settlement, you or a company you hire negotiate with creditors to accept less than the full amount owed. While it can reduce your debt, the process often requires you to temporarily stop making payments, which harms your credit.
Outcome: Settled accounts remain on your credit report for up to seven years, negatively impacting your credit score. The settlement companies typically charge fees, which adds to the cost.
Bankruptcy
Bankruptcy is a legal process that can wipe out unsecured debts when no other options are available. The most common types for consumers are Chapter 7 (liquidation) and Chapter 13 (repayment plan).
Outcome: Bankruptcy offers a fresh start, but it also leaves a serious mark on your credit report. That negative mark lasts up to 10 years for a Chapter 7 bankruptcy. This can make it difficult to qualify for loans, credit cards or favorable interest rates in the future.
Frequently asked questions
Medical debt is unsecured debt because it isn’t tied to any collateral. It can affect your credit if reported to the credit bureaus. Unpaid medical bills sent to collections can have serious consequences for your credit score and ability to borrow money.
You can’t wipe out all debts in a bankruptcy. Debts such as federal student loans, certain tax debts and court fines and penalties aren’t eligible for discharge. These obligations will remain even after eligible unsecured debts, such as credit cards or medical bills, are discharged through bankruptcy proceedings.
Lenders often look for a DTI ratio of 35% or lower when approving unsecured loans. A lower ratio shows you have more room in your budget to take on new debt. If your DTI is higher, lenders may charge higher rates, require a larger down payment or deny your application.
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