how an unsecured creditor works
it s uncommon for individuals to be able to borrow money without collateral for example when you take out a mortgage a bank will always hold your house as collateral for the loan in case you default if you take out a loan on an automobile the lender will secure their debt with your car until it s fully paid off one exception wherein money is borrowed without collateral is large corporations which often issue unsecured commercial paper unsecured credit is viewed as a higher risk differences between secured and unsecured creditorssecured creditors may repossess assets as payment for a debt using the borrower s collateral since the borrower has more to lose by defaulting on a secured loan and the lender has an asset to gain this type of debt carries less risk for the lender as a result secured debt generally comes with lower interest rates when compared to unsecured debt meanwhile repayment to unsecured creditors is generally dependent on bankruptcy proceedings or successful litigation an unsecured creditor must first file a legal complaint in court and obtain a judgment before proceeding with collection through wage garnishment and other types of liquidated borrower owned assets often a creditor will first attempt to obtain payment through direct contact and report the outstanding debt to the major credit bureaus equifax experian and transunion before seeking to bring the matter to court the creditor may also choose to sell the unpaid debt to a collection agency types of unsecured creditorsdue to the high risk to the lender unsecured debt often comes with higher interest rates placing a higher financial burden on the borrower some of the most common types of unsecured creditors include credit card companies utilities landlords hospitals and doctor s offices and lenders that issue personal or student loans though education loans carry a special exception that prevents them from being discharged defaulting on unsecured debt can negatively affect the borrower s creditworthiness making it much less likely that an unsecured creditor will extend them credit in the future 