Understanding unsecured debt

When taking on debt, it’s a good idea to understand the difference between secured and unsecured debt. Here, we’ve broken down what each one means and what to consider.  

What is an unsecured debt?

An unsecured debt does not have any major assets – such as a property – linked to it. This means your house or a car, for example, cannot be taken by creditors to repay the debt, should you find yourself unable to pay it.

Instead, a creditor will take a look at your credit rating and report as a whole, to determine if they should lend any money to you.

The only way a creditor could use your assets to repay what you owe is by going to court and having a County Court Judgment (CCJ) issued against you. They could also request the court to make you bankrupt. However, these options are usually last resorts.

Types of unsecured debts

• Personal loans.
• Overdrafts.
• Utility bills.
• Credit cards.
• Payday loans.

What is a secured debt?

A secured debt is usually assigned to an asset you own – such as a property. This means should you fall behind on repayments and all other action has been taken by the creditor in an attempt to receive what they are owed; the property can be used to pay off the debt.

Types of secured debts

• Car finance.
• Mortgages – The deposit you put down is the portion of the property you own, the rest belongs to the mortgage lender until you pay off the mortgage.
• Logbook loans – You put forward your car against the loan.
• Pawnbroker loans – You will usually trade in a high-value item, such as an electrical item or jewellery, for a small loan. You get your belongings back when the loan is paid.

What are the features of unsecured debt?

Unsecured debts may offer less risk for you, as nothing you own is tied to them but they do have some restrictions. Here we’ve broken down the main elements to consider:

1. Your assets – Such as your property or high-value personal items – are not at risk. Only if you fall behind on repayments and the lender applies for a CCJ or your bankruptcy is your personal property at risk.
2. You can generally only borrow up to £25,000 with an unsecured loan – If you need a bigger loan, perhaps for home renovations, you would need to look at a secured option.
3. Unsecured loans are easier and quicker to obtain, as the only vetting process is usually your credit report with no need to value your assets.
4. You need a very good credit rating to get the best deal on unsecured debt – If your credit rating is low, it can be more difficult to get accepted by a lender.
5. You have more flexibility with unsecured loans – They can be used to pay for a wider variety of needs. This is unlike secured loans – you must specify what they are being used for.
6. Unsecured debt is generally more expensive interest wise – As lenders look to receive a bigger return on their investment because there is no asset for them to fall back on.