Woman looking concerned over unsecured debt

What is unsecured debt?

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Updated: March 14, 2024

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With the rising cost of living, Canadians are increasingly taking on debt by relying on credit cards, personal loans, and other options to cover expenses. It's important to understand that not all debt sources are created equal. Debt comes in both secured and unsecured forms. Is one better than the other? Unsecured debt might sound less desirable, but that doesn't mean it is.

Before taking on unsecured debt of any kind, it's essential to understand what it is, how it works and how it could impact your credit. This article explains unsecured debt, the most common types Canadians take on, and whether it may suit your situation.

What is unsecured debt in Canada?

Unsecured debt is debt that does not have collateral attached to it. This means no assets are available for the lender to seize (e.g., a deposit or a home) should you default. Since the lender’s risk is higher, you’ll generally experience higher interest rates and decreased loan sizes than on secured loans.

What are the different types of unsecured debt?

Credit cards

Credit cards provide a convenient way to purchase up to a specified limit. Credit card debt must be paid within the month it was acquired. Any leftover balance from the previous month is subject to interest charges, which add to the balance and, thus, your repayment amount.

If you pay your balance in full every month, there is no charge for carrying credit debt. That said, easy access to credit can come at a cost, as credit cards typically charge 20%+ interest on unpaid balances. The high-interest rates usually associated with credit cards emphasize the need for responsible financial management by following the 20 golden rules of credit cards.

Student loans

With student loan debt, missing payments for over 270 days puts you in default. In this case, your payments are sent to the CRA for collection. To prevent this scenario, review smart strategies for repaying student loans.

Student loans, offered by government and private lenders, are designed to assist students with educational expenses. They differ from other unsecured loans because payments generally kick in after a post-graduation window. This gives you time to get a job before you are required to start paying back your student loan.

Personal loans

Personal loans offer a predictable way to borrow money from banks, online lenders, or financial institutions. You borrow a lump sum, which is repaid consistently throughout your loan term.

Personal loan interest rates decrease with a lower payback period and higher credit score. Always shop around to find the best rate. You can start with the best personal loans in Canada.

Payday loans

Payday loans have astronomical borrowing costs and should only be used as a last resort. They are designed to provide small, short-term relief while you await your next paycheck.

Be extra cautious when pursuing a payday loan. It's wise to avoid payday loans altogether. Lenders often have complex fees that can deceive unsuspecting borrowers into borrowing more than they can afford to pay back. Always inquire about the APR rather than the interest rate, as the former calculates the total cost of borrowing. 

Cell phone and utility bills

Remember to pay your bills! Unpaid balances for cell phone plans, electricity, gas, and water bills generally incur interest. While the interest rates may not be as high on these types of debts as on other forms of unsecured debt, such as payday loans, failure to pay can result in service interruptions and collection efforts.

Business loans

Entrepreneurs and small business owners use unsecured business loans to finance operations. These can have varying structures, such as a line of credit or lump sum loan. Furthermore, terms can range from a few months to several years.

Medical debt

In Canada, medical debt comes from non-public healthcare services, such as dentists, private procedures and rehabilitation. While less common than in the United States, some providers may offer payment plans with interest.

Pros and cons of unsecured loans



  • Faster funding since there is no need to value collateral assets

  • Lower administrative fees than secured loans, make them more appealing for smaller amounts

  • No risk of losing your collateral asset



  • Higher interest rates due to increased lender risk

  • Lenders are less likely to loan you large amounts

  • Missing payments damages your credit score, and lead to bankruptcy

  • More scrutiny on your income stability and credit score

Secured debt vs. unsecured debt: What’s the difference?

Unsecured debt is riskier to lenders because there is no collateral. As such, unsecured loans tend to have higher interest rates and lower loan amounts. Lenders are more cautious with unsecured loans, resulting in more scrutiny of your income stability and credit score.

However, the application process for unsecured loans is more streamlined as you won’t need to appraise any assets. This can result in lower administrative fees, somewhat offsetting the higher interest rates.

Unsecured debt relief options

Debt settlement

Debt settlement involves using a third party to negotiate with creditors. The goal is to negotiate a lower amount owed. However, this service can negatively impact credit scores, and the third party charges a fee.

Debt consolidation

Debt consolidation uses a larger loan to centralize multiple debts, such as credit cards or payday loans. The goal is to use a lower-interest-rate loan to pay off high-interest-rate debt. However, a secondary benefit is centralizing payments, making management and tracking easier.

When finding the best option for debt consolidation loans, assess interest rates, loan terms, and eligibility criteria. A comprehensive evaluation allows individuals to choose a consolidation plan that best suits their financial needs when comparing the top providers.

Debt management plan

Non-profit agencies often facilitate a debt management plan. It consolidates debts into a single monthly payment with potentially lower interest rates.

Debt forgiveness

Debt forgiveness, though rare, involves lenders forgiving a portion of your loan. However, it can lead to tax implications and credit score impacts, and you're still on the hook to pay the remaining amount.


Bankruptcy is a legal process in Canada for those with overwhelming debt. It can eliminate most debts through bankruptcy filings. While it provides relief from debt, bankruptcy significantly affects credit scores and can have long-term financial repercussions.

Consumer proposal

A consumer proposal is more favourable than bankruptcy. It allows individuals to negotiate with creditors to repay a portion of their debts while protecting their assets. However, consumer proposals can negatively impact your credit score.

  • Is unsecured debt good or bad?


    Unsecured debt is good if you need financing and don’t want to risk assets. However, it has higher interest rates than secured loans.

  • Which is better: secured or unsecured debt?


    Secured debt has better terms. The interest rates are lower, and you can borrow more significant amounts. However, some borrowers prefer to collateralize assets, making unsecured debt the better option.

  • Does unsecured debt hurt your credit score?


    If you fail to make payments on unsecured debt, your credit score will be hurt. Furthermore, carrying high balances on credit cards can lower your credit score.

  • Are student loans considered unsecured debt?


    Yes, most student loans are unsecured because they are not backed by collateral. Government student debt is only forgiven through bankruptcy after +7 years of school.

  • Can you lose your home over unsecured debt?


    While you can't directly lose your home over unsecured debt, failing to make payments can result in legal proceedings. Unsecured debt can lead to bankruptcy and may affect your ownership of your house, such as liens placed against it.

Lucas Elliott Freelance writer

Lucas, a Toronto native, holds an Honours BBA (Finance) degree obtained from Wilfrid Laurier University. His career has spanned venture capital and blockchain startups. Aside from writing at Moneywise, Lucas is a Hardbacon and Loans Canada contributor, and content specialist at Croton Content. Additionally, his passion for exploring the world has taken him to an impressive 28 countries across Europe, North America, Asia, and Central America.


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