Understanding What It Is
Unsecured debt is any amount owed that is not tied to an asset or piece of property. For instance, with a mortgage loan your debt is secured by a house or with a car, and the creditor can repossess the property if you stop paying. Unsecured debt includes credit card balances, student loans and some personal or business loans. When a creditor commits to an unsecured loan, the company is taking a greater risk as compared to a secured debt, so the interest rate is usually higher.
Application and Terms
Once the customer applies for unsecured debt, the creditor evaluates his credit report and income to make a decision on the loan or credit line. The applicant's credit must be good to exceptional to be approved for this type of loan. A FICO score over 700 is looked at positively, while a score over 760 is considered to be "excellent." The interest rate on the credit line, loan amount or credit limit, monthly payment, and term in months (if this is an installment loan) is then offered to the customer.
Funds Are Disbursed
Once the customer accepts the terms of the new credit line, the funds are disbursed. In the case of a credit card, cards are sent out to the customer that can be activated and used immediately. Using the funds is final acceptance of the terms of the unsecured debt.
Payments Resume
The customer must then make regular payments on the unsecured debt to keep his account in good standing. Payments must be made on time or the loan will be placed in "default" status. For many unsecured debts the account is considered to be in default if the payment is even one day late. Late charges are assessed and special rates are taken away if the payment is late.
In Case of Default
If a payment is more than 30 days late, the offense is reported on the consumer's credit report, which will reduce his FICO score. The creditor will attempt to collect the amount owed with letters and phone calls. If the payment continues to be late past 180 days, the unsecured debt may be charged off and passed onto a collections agency to retrieve the money from the debtor. If payment cannot be recovered, the agency may pursue legal action and attempt to garnish the debtor's wages.
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