Unsecured debt means that you have borrowed an amount of money without collateral (an asset used to guarantee a loan or obligation) backing the loan. This has several consequences for both the lender and borrower. Lenders increase their risk because their only option to reclaim a defaulted loan is to take legal action. Thus, lenders charge higher interest rates on unsecured loans.

Borrowers, subsequently, pay higher interest rates for the loan, but do not directly jeopardize property as a result of the loan. Debtors may have to sell property to repay a loan, but that is their choice unless the court has ordered a liquidation of assets.

For example, you walk into a bank and request $5,000. They would run a credit check to determine your creditworthiness and then decide upon an interest rate accordingly. The loan would require you repay the amount over a certain period of time and with a fixed or variable interest rate. Other stipulations, such as an early repayment penalty, may apply but that is a simplified scenario of obtaining an unsecured loan.

Another form of unsecured debt is credit card debt. Banks and other financial institutions issue credit cards to consumers solely on good faith that the consumer will make their payments. Therefore, creditworthiness is instrumental in determining the interest rate, which is typically high—20 percent or more. Issuers of credit cards still maintain the right to take legal action to recover borrowed amounts.

Credit card debt is different than a normal unsecured loan, though. Credit card debt is also revolving—meaning you can borrow $3,000 (if your limit is $3,000 or more) one month, repay the amount and borrow $3,000 again. This cycle can be beneficial for consumers that only need temporary cash until they have the funds to repay that amount. However, credit card debt can entangle a consumer in seemingly never ending cycle of bills.

The good news is that there are several successful methods for eliminating debt. There is magic solution to your debt problems; but if you are committed to change, you can become debt free.