Unsecured Creditors Examples: Common Types and How They Work

Businesses and individuals often rely on credit to manage expenses, fund operations, or cover unexpected costs. Some creditors require collateral, while others extend credit based solely on trust in the borrower’s ability to pay. These latter creditors are known as unsecured creditors.

General Traits of Unsecured Credit

Unsecured credit does not require collateral, meaning repayment depends entirely on the borrower’s financial stability. Lenders assess risk through credit scores, income levels, and debt-to-income ratios. Borrowers with strong financial profiles receive lower interest rates and higher borrowing limits, while those with weaker credit histories face higher costs and stricter repayment conditions.

Because unsecured credit carries a higher risk of default, lenders charge higher interest rates than secured loans. As of 2024, the average interest rate on unsecured personal loans in the U.S. ranges from 10% to 36%, depending on the borrower’s credit profile. In contrast, secured loans, such as mortgages, often have significantly lower rates. Unsecured credit agreements frequently include provisions for late fees, penalty interest rates, or legal action if payments are missed.

Unsecured credit is typically structured as either revolving or installment debt. Revolving credit, such as credit cards, allows borrowers to access funds repeatedly up to a set limit, with interest accruing only on the outstanding balance. Installment loans, such as personal loans, require fixed monthly payments over a predetermined period.

Examples of Unsecured Creditors

Unsecured creditors provide financing without requiring collateral, relying instead on the borrower’s creditworthiness.

Credit Card Issuers

Credit card companies extend revolving credit, allowing consumers to borrow up to a predetermined limit and repay the balance over time. Unlike installment loans, credit cards do not require fixed monthly payments beyond the minimum due, typically 1% to 3% of the outstanding balance plus interest and fees. Interest rates vary widely, with the average annual percentage rate (APR) in the U.S. ranging from 16% to 25% as of 2024, though penalty APRs can exceed 29% for late payments.

Credit card issuers assess risk using credit scores, payment history, and income levels. They charge fees such as annual charges, late payment penalties, and cash advance fees, typically 3% to 5% of the transaction amount. If a borrower defaults, issuers may sell the debt to collection agencies or pursue legal action.

Medical Service Providers

Hospitals, clinics, and private practitioners act as unsecured creditors when they provide medical services without requiring upfront payment. Instead, they bill patients after treatment, expecting payment within 30 to 90 days. If the balance remains unpaid, providers may charge late fees or refer the debt to a collection agency, which can negatively impact the patient’s credit score.

Medical debt differs from other unsecured obligations because it does not accrue interest in the same way credit cards or personal loans do. However, once transferred to collections, agencies may add fees or negotiate settlements for less than the full amount owed. The No Surprises Act, effective since 2022, protects consumers from unexpected out-of-network medical bills, but patients remain responsible for in-network charges. Some providers offer payment plans or financial assistance programs for low-income individuals.

Personal Loan Lenders

Banks, credit unions, and online lenders issue unsecured personal loans, which are installment debts repaid over a fixed term, typically ranging from 12 to 60 months. Loan amounts vary, with most lenders offering between $1,000 and $50,000, though some extend up to $100,000 for well-qualified borrowers. Interest rates depend on creditworthiness, with APRs ranging from 10% to 36% as of 2024.

Unlike credit cards, personal loans have fixed monthly payments, making them predictable for budgeting. Lenders evaluate applicants based on credit scores, income, and debt-to-income ratios, often requiring a minimum credit score of 600 to qualify. Some lenders charge origination fees, typically 1% to 8% of the loan amount, deducted from the disbursed funds. If a borrower defaults, lenders may report the delinquency to credit bureaus, pursue legal action, or sell the debt to collection agencies.

Treatment of Unsecured Claims in Bankruptcy

When individuals or businesses file for bankruptcy, unsecured creditors face a greater risk of not recovering the full amount owed. Unlike secured lenders, who can seize collateral if a borrower defaults, unsecured creditors must rely on legal proceedings to determine what portion, if any, of their claims will be repaid.

In Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated to pay creditors. However, unsecured claims are addressed only after higher-priority obligations, such as taxes and employee wages, have been satisfied. Creditors with general unsecured claims, including credit card companies and medical providers, often receive little to no repayment. If funds remain after priority debts are settled, they are distributed proportionally among unsecured creditors. In many cases, the court discharges remaining unsecured debt, meaning creditors must write off the unpaid balances.

Chapter 13 bankruptcy, available to individuals with regular income, offers a structured repayment plan lasting three to five years. Instead of liquidating assets, the debtor makes scheduled payments to a trustee, who then distributes funds to creditors. Unsecured creditors typically receive a fraction of what they are owed, with repayment amounts depending on the debtor’s income and necessary living expenses. Once the repayment plan is completed, any remaining unsecured debt is discharged.

For businesses, Chapter 11 bankruptcy allows for reorganization rather than immediate liquidation. Companies can continue operations while restructuring their debts under court supervision. Unsecured creditors may form a committee to negotiate repayment terms, often accepting reduced balances or extended payment schedules in exchange for a higher likelihood of recovery. The court must approve any repayment plan. If the business fails to meet its obligations under the plan, liquidation may follow, further reducing potential payouts for unsecured creditors.