Types of Unsecured Debt

Unsecured debts can be a valuable tool if used wisely. Credit cards and personal loans allow consumers to plan for emergencies with a greater level of spending freedom. In addition, making timely payments on these unsecured debts helps you to build a positive credit history that will influence your interest rates on all types of future debt. Be careful to always pay your unsecured debts--not paying can potentially carry legal consequences.

The Facts

There are two categories of debt: secured debt and unsecured debt. As opposed to secured debts in which a creditor holds collateral to ensure the debt gets paid, unsecured debts require no form of collateral from the borrower. In the event that an unsecured debt goes unpaid, the creditor cannot seize your belongings as payment. This includes placing a lien on your home or vehicle. Unsecured debts typically have higher interest rates than secured debts due to a higher risk of nonpayment.

Credit Cards

Credit cards are the most common form of unsecured debt. A credit card account is considered revolving debt, because as you pay down your balance, your available credit "revolves" back into your spending limit. Credit cards are a particularly dangerous variety of unsecured debt because they allow you to make large purchases while paying very small minimum payments. When high interest rates and finance charges are taken into consideration, you can easily end up in a situation where your minimum payment is less than the interest charges and fees that accrue every month.

Personal Loans

Banks distribute a variety of loans such as mortgage loans, home equity loans and car loans. Banks also, however, are the primary distributors of personal loans. A personal loan is an unsecured loan granted to you by a bank on the basis of your credit history. There are no stipulations on how you must spend a personal loan. When you apply, your lender will evaluate your past credit history to determine how reliable you are about paying your debts. A good history of timely debt payment is required for a low interest rate on a personal loan. Unlike credit card debt, personal loans are considered installment debts because they must be paid back in set installments by a certain date.

Medical Debt

Medical debts are any debts you accrue for medical services. Emergency room visits, lab work and dental work are all considered medical debt. If you have insurance, you are only responsible for the medical debt your insurance company does not cover. While an individual must be an adult to qualify for a credit card or a personal loan, minor children can accrue medical debt. Children cannot be held legally responsible for the debts they owe, therefore a child's parent or guardian is responsible for paying his medical debts.

Warning

Just because unsecured creditors cannot seize your property to recover the balance of a debt, that does not mean you cannot be forced to pay. Creditors have the option to file a lawsuit against you for unsecured debts that go unpaid. If you lose, you are responsible for paying the past due debt along with any fees the debt has accrued and court costs. If wage garnishment is legal in your state, you can expect your creditor to request it. When this occurs, your paychecks will be docked a certain amount every pay period until your unsecured debt is paid in full.