What is unsecured debt?

A lot of people have heard of `unsecured debt` and `secured debt`, but not everyone knows exactly what they mean.

They are both types of debt that must be repaid - but there are big differences in the potential consequences of being unable to repay either type of debt.

Explaining secured and unsecured debt

A secured debt is any debt against which assets (normally your home, but sometimes other expensive items like your car) are placed as `security`. This basically means that if you can`t afford to repay a secured debt, your property may be `repossessed` so the lender can recover their money.

So it follows that an unsecured debt is a loan or other form of credit that isn`t linked to your assets in any way. There are still serious consequences for not repaying an unsecured debt - and it could actually end up being secured against property you own through what`s known as a `charging order` - but you wouldn`t be at immediate risk of repossession.

The vast majority of credit cards, overdrafts and payday loans, to give just three examples, are unsecured. Mortgages are the most common type of secured debt.

Getting help with unsecured debts

If you`re struggling with unsecured debts, you should get advice on the various debt solutions designed to help people in this situation. For example, a debt management plan or an IVA (Individual Voluntary Arrangement) could reduce your monthly payments to an affordable level, making your unsecured debts manageable again.

Just remember that any debt solution that involves changes to your repayments will have an impact on your credit rating, and could cost you more in interest over time. In the case of an IVA, you might also be required to release equity from your home in the final year of the arrangement.

Getting help with secured debts

This could be more tricky, because the terms of a secured debt state that if you can`t make your repayments, you may lose the assets you`ve used as security. However, this can sometimes be prevented with early action.

For example, if you have a number of unsecured debts, then one of the previously mentioned solutions (a debt management plan or IVA) could reduce your monthly payments towards your unsecured debts, making room for your secured debt payments.

This isn`t the only approach - and it won`t be right for everyone who`s struggling with secured debts. You should talk to your lender (e.g. your mortgage provider) as soon as you realise you might not be able to keep up with your payments. They may be able to suggest ways they could help you repay the debt at an affordable rate.

Related resources:

• Understanding different debts
• Debt help guide
• Professional debt solutions
• Repossession: what should I do?
• Debt management
• IVA

Tags: unsecured debt, unsecured, debt, types of debt, secured debt

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