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What is unsecured debt?

I just need to know about:

When we borrow money, the money we owe in return is referred to as ‘debt’.

If you’ve ever had a credit card, a home loan, a student loan or a car loan, you’ve taken on a form of debt.

Unsecured debt means that there is no asset – or thing – linked to the money borrowed. For example, there is no home or car that the bank can take if someone doesn’t repay the money they owe. As a result, these forms of debt can sometimes come with higher costs.

Different ways of borrowing have different terms and conditions attached. Let’s run through a couple of them.

Credit cards

Credit cards are used to borrow money to pay for things immediately, with the promise that any money will be paid back with interest at a later date. Interest is the cost of borrowing that money.

For example, a bank may say to someone that they will give them up to $500 a month to spend on shopping, but in exchange for borrowing up to $500 a month, they have to pay that money back as well as a certain percentage in interest.

Over time, borrowers are charged interest on top of their interest and the borrowing amount, which means the amount of money owed back can grow quite quickly.

Payday lending

 

A payday loan is a short-term loan, which often comes with a high amount of fees. As well as a monthly fee, the borrower often has to pay an establishment fee for setting up the loan. This can be very costly.

For example, a $1000 loan over 30 days may cost as much as $1240 to repay, using MoneySmart’s PayDay loan calculator.

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