How is unsecured debt characterized?

Unsecured debt is characterized as debt that does not have collateral backing. This means that lenders provide loans based purely on the borrower’s creditworthiness and ability to repay rather than on any physical asset that could be seized in the case of default. Because there is no collateral associated with unsecured debt, it typically carries a higher interest rate compared to secured debt to compensate for the increased risk taken by the lender.

If a borrower defaults on an unsecured loan, the lender cannot lay claim to specific property to recover the funds owed, which further defines the nature of unsecured debt. This type of debt includes credit cards, personal loans, and student loans, all of which rely on the borrower's promise to repay rather than any specific assets.