What is Unsecured Debt?

Most loans and other financing plans fall into two main categories: secured and unsecured. Secured debts are backed by collateral, which acts as security in case the borrower defaults. It is the primary difference between secured and unsecured debts, which are loan/credit offers without collateral. This raises the counterparty risk, explaining why unsecured loans often carry higher interest rates. Here’s a brief overview of unsecured debts, including how they work, the caveats and key differences with other offers.

Unsecured vs. Secured Debts

Common types of unsecured debts include credit cards, medical loans, payday loans and some personal loans. On the other hand, secure loans include mortgages, car and yacht loans, or any debt without a form of security, such as collateral. Borrowers can put up various assets as collateral, including physical property, like a house, car, piece of land, or stocks and shares. There’s no good or bad to either loan. However, it is essential to understand the caveats that each carries.
In unsecured debts, the creditor awards the loan based on the borrower’s creditworthiness. There’s no security if the borrower cannot repay the loan, significantly raising the counterparty risk. This increased risk results in higher interest rates and shorter repayment periods. Credit cards carry interest rates around 15.07%, while personal loans can claim up to 36% in interest. Payday loans have the highest interests, up to 391%, which is their main demerit.

Secured debts have collateral as security, which means the creditor can claim the asset and use it to repay your outstanding loan. These debts also carry lower interest rates and significantly longer repayment periods. Creditors also review creditworthiness, but the minimum score is lower than what unsecured debt creditors require. If you default on your unsecured debt, the creditor may hand you over to debt collectors or sue you for the outstanding amount.

Benefits of Unsecured Loans

Unsecured loans have various merits and can provide enough to take care of your financial needs. They are much easier to qualify for and often disbursed on the same day. Payday loans, for instance, can be disbursed within 24 hours of requesting. Other advantages include:

    • None of your assets is on the line
    • The loan limit increases significantly every time you pay on time
    • Fewer requirements other than credit checks
    • You can complete the application online
    • You can apply from multiple creditors

Cons

Unsecured debts aren’t all that great, especially when it comes to repayment. Interests are already high and can soar if you delay repayments, resulting in more debt. Unsecured loans also push more people into a cycle of debts that are hard to exit. You only have a few days or weeks to repay the loan, so it is essential to make sure you can raise the loan plus interest before the due date. Failure to pay on time will increase your debt and damage your credit score.

Reducing the Burden of Unsecured Debts

Unsecured loans can leave you unable to get out of debt without aggressive measures. It is advisable to avoid these loans because you pay a lot more in interest than secured loans. However, many people rely on such credits, which can come in handy when you need cash fast. Here’s what you can do to avoid falling deeper into debt:

    • Pay multiple times during the month to offset your debt
    • Build an emergency fund to take care of instances that make you resort to unsecured debts
    • Design your bare-bone budget and stick to it. You should also ditch some expenses and habits
    • Transfer your credit card balance to one with lower interest

Unsecured debts are great when you need cash urgently, but you should ensure you have the means to repay the loan before its due date. You should also compare existing options to find the ideal loan product for your needs.

How Medical Bills Contribute to Rising Debt

Millions of Americans have credit card debt. For many who struggle with chronic or unexpected medical problems, credit cards are an unfortunate last resort when bills begin to pile up. Even healthy Americans may accrue credit card debt simply trying to pay for medical premiums or deductibles for routine care. Learn how medical bills can lead to credit card debt.

6 Medical Expenses that Increase Credit Card Debt

Healthcare is supposed to keep you healthy, but the costs associated with having health insurance and actually using it quickly add up. Take a look at the most common types of medical expenses that contribute to high credit card debt.

Medical Premiums

Premiums for health insurance vary greatly. Higher premiums may be associated with choosing a PPO instead of an HMO. Also, purchasing health insurance yourself instead of through an employer-subsidized benefit program may lead to higher costs.

Health Plan Deductibles

Deductibles are the price you pay for medical and pharmacy services before your benefits actually begin. That means you may be responsible for thousands of dollars in medical costs even if you pay your health insurance premiums on time.

Cost Shares for Medical Services

After your deductible is paid, you will still be responsible for copayments and coinsurance for services received. If you were in the hospital or had a complex procedure, your share of the cost may be more than you can pay.

Uncovered Services

Health insurance covers a variety of services, but not everything. If you need a service that is not covered or your provider didn’t follow plan rules, like completing a prior authorization, you may be responsible for the full cost. Common services not covered by health plans include alternative therapies, acupuncture, and fitness programs.

Health Plan Changes

When changing jobs or moving from one plan year to another, you may experience a temporary lack of coverage or suddenly discover that previously covered services are no longer paid for under your new plan. These health plan changes lead to additional, unexpected out of pocket costs.

Prescription Drug Costs

Costs for prescription drugs are overwhelming as some drugs can be in the thousands per month. But without the drug, your health may suffer. Many people choose to pay for their prescriptions by adding to their credit card debt.

If you’re not financially prepared to pay for the above costs, paying with a credit card may seem like the only option.

Financial Hardship: 3 Reasons Medical Credit Card Debt Rises

In addition to the medical bills discussed above, credit card debt can begin to accrue rapidly after a significant medical event or during chronic illness. Consider the following examples:

  • Time away from work. When you’re unable to work due to a medical issue, you may suddenly need to pay for living expenses without having an income.
  • Medical supplies and durable medical equipment. Certain medical supplies and durable medical equipment may be required for your condition, but may not be covered by your plan.
  • Caring for family members. If you’re caring for a child or family member who has an illness, it’s tempting to cover basic expenses with your credit card while you’re unable to bring in extra income.

You Can Overcome Credit Card Debt

Whether you’re just starting to accrue medical debt on your credit cards or feel like you’re drowning in debt, it’s important to know there is a way out.

A solid financial plan, the development of a reasonable budget and credit counseling are all bankruptcy-free solutions that will get you out of debt over time.

The quicker you pay down your medical credit card debt, the less interest and fees you will pay in the long run which means you keep more of your hard-earned money.