Unsecured debt can be termed as the ‘common man’s debt’ and an easy means to get quick access to money. With this type of debt, the borrower (also called the debtor) doesn’t provide the lender (also called the creditor) with collateral against the debt to ensure its repayment. Rather, the loan is issued simply based on the borrower’s financial ability to repay the loan, using his/her personal assets or income, over a specific time period (the loan term).

While unsecured debts, like personal loans and credit cards, are easily accessible, they also come with some disadvantages, like high-interest rates. In this guide, we’ll expand on these pros and cons so you can make an informed decision.

Types of Unsecured Debt

From credit cards to predatory payday loans, borrowers have a wide variety of unsecured debt options available to them. However, these are the most common and most frequently used examples of unsecured debt.

Credit Cards 

With over 75% of U.S. households using at least one credit card, it’s the most common type of unsecured debt. It’s a type of revolving debt where you pay the outstanding amount borrowed, in part or in full, every billing cycle. 

Credit card debt is subject to high interest rates, so it’s important to use it responsibly. Ideally, you should pay off the entire balance at the end of each month to avoid interest charges.  If you are unable to do that, you will begin paying interest on the average balance that you carry each month.  

Most interest rates on credit cards are variable, which means the rate can change as frequently as every month based on changes in overall interest rates or, more specifically, changes in the interest rate index (e.g., the U.S. Prime Rate) upon which your card’s rate is based.  These days, the average credit card interest rate, or annual percentage rate (APR) for all categories of credit cards, is 27.91% as of Q1, 2024.

Student Loans

A student loan is an unsecured debt to pay for tuition and education-related expenses. Most students borrow federal student loans, but other options are also available. 

With longer repayment periods, usually ten years or more, and interest rates of 5.50% to 8.05%, student loans can be a viable option for those who want to attain a degree to improve their career prospects. 

Personal Loans

An unsecured personal loan can be used for any purpose, such as for home renovations, car repairs, medical bills, and debt consolidation. These loans typically have a fixed interest rate, which means your monthly payment will remain the same throughout the term.

Although this unsecured loan needs no collateral, you must demonstrate creditworthiness through a steady source of income, a low debt-to-income ratio, and a good credit score to qualify for lower interest rates.

Advantages of Unsecured Debt

Unsecured debt has many benefits, such as ease of access and flexibility when it comes to the use of funds.

No Collateral

Unsecured debt is good for people who don’t want to put their assets at stake. Since you don’t need collateral, you can freely trade your assets and enjoy peace of mind. However, you must repay your debt on time to avoid other consequences like damage to your credit score and collection calls.

Easy Disbursal

Unsecured loans offer access to funds quickly, sometimes in as little as 24 hours. Creditors rely on your financial records and credit score to assess their risk, which can be checked within minutes. The best examples of this are credit cards and same-day loans for bad credit


Unsecured debts generally offer the flexibility of repayment in short or long terms, so you can choose a repayment term you’re comfortable with. You’ll also have the flexibility of using the funds for any purpose. 

Disadvantages of Unsecured Debt

On the flip side, there are a few disadvantages of unsecured debt, which we’ve listed below.

High-Interest Rates

Unsecured debts can have interest rates (APRs) as high as 36%. Since these loans aren’t backed by collateral, there’s a greater risk for lenders. They make up for this higher risk by charging higher interest rates. 

A Good Credit Score Is Needed

Creditors require you to have a “good” credit score (i.e., an average FICO score of 680 or better) and a regular source of income. If you are struggling with your credit history for any reason, getting an unsecured debt may be challenging.

While there are many unsecured loans with bad credit available, you’ll likely pay high interest rates. 

Choosing Between Unsecured and Secured Debt 

Secured and unsecured loans work differently and are useful in different situations. 

Secured loans are usually better when you have collateral to offer, have bad credit, or want to borrow a larger amount of money, such as with an auto loan or mortgage. They’re also easier to qualify for but come with the risk of repossession or foreclosure if you fail to repay.

Unsecured loans may be better when you want to borrow a smaller amount, have a good credit score, and have financial stability or when you don’t have collateral to offer. Keep in mind that most lenders will require you to have a good credit score (typically 680 and above) to qualify. 

What Happens if You Don’t Pay an Unsecured Debt

Here are the consequences of not paying an unsecured debt:

  1. If you’re more than 30 days late on a loan payment, the lender will typically contact you by phone and/or by letter to your address of record and remind you to pay. 
  2. A late fee to your account and a higher “default” interest rate of 29.99% or more may be applied to any new purchases you make on your credit card or advances you take on your line of credit going forward.  Late payments of 30 days or more can damage your credit report significantly. 
  3. After 90 days of non-payment, your credit card account may be closed, and it may be handed over to the collection department. 
  4. After 120 days, your debt may be sold to a collection agency, and you will start receiving debt collector calls. The collection agency can also take legal action at this stage.
  5. Depending on the state you live in, the court can order a lien on your assets to recover the outstanding amount. If you don’t have assets, your salary may be subject to wage garnishment.

What To Do If You Can’t Pay Unsecured Debts

If you’re finding it difficult to repay unsecured debts, the first thing to do is to contact the lender and explain your situation. Some lenders may have hardship programs. 

If your account is in collections or if you have a considerable amount of debt, you may want to consider debt settlement

Consider reaching out to a debt relief company like TurboDebt to explore your options.