Turbo Takeaways
- Unsecured debt provides quick access to money without requiring collateral.
- Since lenders take on more risk with this type of debt, interest rates tend to be higher, and approval typically depends on a borrower's creditworthiness and income.
- While options like personal loans and credit cards are easy to obtain, they also come with drawbacks, such as high interest rates and stricter repayment terms.
What Is Unsecured Debt?
Unsecured debt refers to loans or credit that don’t require collateral. Unlike secured loans, where an asset backs the debt, unsecured debt carries a higher risk for lenders, leading to elevated interest rates.
Because these loans aren’t tied to assets, they can be used for anything from everyday purchases to major financial needs. Lenders or creditors approve borrowers based on their credit history, income, and overall financial stability.
Failure to repay unsecured debt can still have serious consequences, including damage to your credit score and collection efforts, even if it doesn't involve repossession of assets like a car or home foreclosure.
Keep reading to explore different types of unsecured debts and how they work to help you make the right financial decisions.
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 82% 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 credit accounts responsibly. Ideally, you should pay off the entire balance at the end of each month to avoid interest charges. If you're unable to do that, you'll begin paying interest on the average balance that you carry each month.
Most interest rates on credit cards are variable. This means the rate can fluctuate as frequently as every month based on changes in overall interest rates or, more specifically, changes in the interest rate index (U.S. Prime Rate).
As of August 2025, the average credit card interest rate, or annual percentage rate (APR) for all categories of credit cards, was 23.99%.
Credit card debt is subject to high interest rates, so it’s important to use credit accounts responsibly.
Student Loans
A student loan is an unsecured debt used to cover tuition and other 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 for federal loans starting at 6.39%, student loans are 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 various purposes, including 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 quick access to funds, 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.
Flexibility
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
There are a few disadvantages of unsecured debt, like the ones listed below:
High Interest Rates
Since unsecured debts aren’t backed by collateral, lenders face a greater risk when loaning funds to consumers. They make up for this increased risk by charging higher interest rates. Interest rates for unsecured debts can reach nearly 40%.
Requires a Good Credit Score
Creditors require you to have a “good” credit score (680 or better) and a regular source of income. If you're struggling with your credit history for any reason, securing an unsecured loan may be challenging.
While there are many unsecured loans with bad credit available, you’ll likely pay high interest rates.
Know Your Score!
Monitor your credit score at least once a year to stay informed. All three credit reporting bureaus offer free credit checks.
Choosing Between Secured and Unsecured Debt
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 financial stability, or don’t have collateral to offer.
What Happens if You Don’t Pay an Unsecured Debt?
Here are the consequences of not paying an unsecured debt:
- Lenders will typically contact you by phone or letter if you’re more than 30 days late on a loan payment.
- Creditors may apply a late fee, and a higher “default” interest rate of 29.99% or more to any new purchases or advances on your line of credit.
- Payments that are late by 30 days or more can significantly damage your credit report.
- After 120 days of nonpayment, your debt may be sold to a collection agency, and you’ll start receiving debt collector calls. The collection agency can also take legal action at this stage.
- 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.
Get Help Paying Unsecured Debts with TurboDebt®
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 offer hardship programs to help consumers who are struggling to pay bills.
When your accounts are past due and you're carrying a considerable amount of unsecured debt, consider debt settlement. Partnering with a trusted debt relief organization like TurboDebt® can help you eliminate unsecured balances from credit cards, personal loans, and other accounts.
Reach out to the team at TurboDebt today to explore your options and find out if you qualify for our debt relief program. It only takes a few minutes to complete a free consultation about your debt and financial goals.