Unsecured debt

Unsecured debt is a loan or trade credit for which the lender or creditor does not require any collateral. For example, a credit card company does not secure any debt held by a credit card holder with the personal assets of the individual. Similarly, a utility will rarely require more than a modest deposit prior to beginning service to a new customer location; thus, it is essentially unsecured debt. Since the risk of loss is higher for the lender in an unsecured debt arrangement, the lender typically charges a significantly higher interest rate, so that it earns more from interest income than it loses in bad debt losses. In the event of bankruptcy, an unsecured creditor is positioned after secured creditors for reimbursement.

Related Courses

Corporate Finance 
Treasurer's Guidebook