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What Is an Unsecured Note?

Lenders who issue unsecured notes place faith in borrowers to repay them.
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  • Written By: Anna T.
  • Edited By: Melissa Wiley
  • Last Modified Date: 24 September 2014
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An unsecured note, also commonly referred to as unsecured debt, is a type of debt or loan that is given without any collateral to back it up in the event that the note is not paid. Many banks and other financial institutions require that a person agree to hand over some type of personal property, or collateral, if she cannot pay back the amount of money she was loaned. With an unsecured note, the financial institution loans the money based on nothing more than the promise of a person to pay the money back. This is why most financial institutions will not give these loans to people who do not have good credit. If a person with poor credit is approved for an unsecured note, it is likely that the interest rate on the note will be incredibly high.

Many types of loans, such as mortgages and auto loans, are given with the understanding that the home or car the money was loaned for can be taken back by the bank if the loan becomes delinquent. These are types of secured notes. One of the best examples of an unsecured note may be medical bills. In most cases, a person does not have to put up any type of collateral in exchange for having a medical procedure done. Depending on a person's insurance, the final bill after the procedure is complete could be thousands of dollars.

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Many people get into financial trouble because of unsecured medical debt. Having an expensive medical procedure done is not always a choice, and in many cases a person's life may depend on whether he can afford it. When the procedure is over, doctors and hospitals expect to be paid for their services, and many people simply cannot afford to pay because it is typically an unexpected expense. It is usually possible for a person to work out payment arrangements with various medical facilities, but all too often the unsecured note will go unpaid and reflect negatively on a person's credit report.

In general, unsecured notes are risky for lenders and borrowers. These notes are risky for lenders because they are putting faith in the borrower to pay them back. The notes are risky for borrowers because financial circumstances can change unexpectedly, and money that is there today may not be there tomorrow. A borrower who does not make good on her promise to pay an unsecured note may not stand to lose any personal property, but there is a very good chance that the bank or financial institution might take legal action against her to cover its losses. Neither lenders nor borrowers want this to happen because taking legal action can be expensive for both parties involved.

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