What Are Unsecured Bonds?

Unsecured bonds are kinds of securities that allow an individual to lend money without having any specific assets serve as collateral.

This allows businesses and governments to make use of capital when they don’t actually own the physical property which is essential for them to secure this kind of loan.

These types of loans make it possible for entities to borrow against their own ability to repay a debt. What this means is that the government or business need only demonstrate that they have value and income coming in, but don’t have anything which can be taken away if they fail to comply with the terms of the loan.

How Do They Differ From Secured Bonds?

Secured bonds involve some sort of collateral being posted for a loan so that investors have something to take possession of if the borrower fails to meet their loan obligation.

They are borrowing against an asset which they own, such as land or equipment.

When Is It Appropriate To Use Unsecured Bonds?

Whenever a business or government has some property that is of high value but for one reason or another doesn’t have something that can be taken away from them if they default on their loan, then this is a case where an unsecured bond might work best.

This gives both parties the security that the repayment terms will be met. Both parties can invest in each other with the confidence that, if one of them fails then they will still have something left on their side which can be used as repayment.

What Benefits Does Using Unsecured Bonds Have For The Investor?

Investing in securities like this provides the benefit of having the ability to invest in a business or government that you would not otherwise be able to because they don’t actually own anything of value.

What this kind of investment provides is an incentive for borrowers to pay back their loans with high-interest rates and repayment terms which are more advantageous than those on a traditional loan.

Another benefit to these kinds of securities is that they can be bought and sold just like stocks, which makes them more liquid than some other types of investments.

What Risks Are Involved With Investing In Securities Like This?

While there are many benefits involved with investing in securities like this there are also some risks. If you are not careful, then you run the risk of losing all of the money which you have invested in these securities.
Investors need to know what they are getting into before they dive headfirst into something new. What you need to do is make sure that, before you invest in an unsecured bond, that you know what the terms are.

Gathering more information about these securities allows you to determine whether or not you believe that these securities will be able to pay back what they owe. It is essential to be well informed about any changes in the terms of the loan so that you can determine if it is still worth your time. This then provides better leverage in managing the risks.

Tips On How To Get The Most Out Of Your Investment In An Unsecured Bond

To get the most out of your investment in an unsecured bond you need to be prepared. Before you invest in these securities, you need to research as much as possible to find out what the repayment terms are and how likely it is that they will be met.

Being well informed allows you to make an informed decision and determine if this is something that you want to get involved with or not. It also helps you manage the risks associated with an unsecured bond and gives you a chance to protect yourself from losing your money in something which might not pan out as you had hoped.

How To Get Started Investing In Them

Investing in unsecured bonds is relatively easy. What you need to do is get yourself a brokerage account and then talk to your financial adviser about unsecured bonds which you might be interested in buying.

How To Protect Yourself When Investing In An Unsecured Bond

What you need to avoid when dealing with securities like this is investing in something which you don’t understand.
Investing on something that you don’t have a grasp on leaves you vulnerable to making a mistake and losing money. Investing in unsecured bonds allows you to make an investment that has similarities with other types of traditional methods but it can be risky if you aren’t careful because the terms that are involved might not be what you would expect them to be.

Some tips to consider are to make sure that you talk to your financial adviser before you buy anything like this to find out what the repayment terms are.

They can also help you with setting up a payment plan which will allow you to pay off your investment if something happens and it can’t be paid back right away.

The Bottom Line

As a recap, unsecured bonds are an investment that is similar to buying stocks or bonds but does not require you to own any property because they are backed by the borrower rather than something of value. What this kind of investment provides is an incentive for borrowers to pay back their loans with high-interest rates and repayment terms.

What you need to do is make sure that, before you invest in an unsecured bond, that you know what the terms are. Gathering more information about these securities allows you to determine whether or not you believe that these securities will be able to pay back what they owe.

It is essential to be well informed about any changes in the terms of the loan so that you can determine if it is still worth your time. This then provides better leverage in managing the risks.

To get the most out of your investment in an unsecured bond you need to be prepared. What you need to do is get yourself a brokerage account and then talk to your financial adviser about unsecured bonds which you might be interested in buying.

Technically, an unsecured bond is one that does not involve the backing of any physical assets. This type of bond is not backed by something tangible like real estate or gold so there isn't anything that can be taken away from them to pay off what they owe if they get into financial trouble.
Secured investments come with a guarantee that if something happens and you can’t make your payments, the lender will take possession of whatever is being used as collateral.
Unsecured bonds are used when somebody needs money and doesn't have enough assets to offer as collateral. This allows the borrower to get access to capital that they might not otherwise be able to acquire without putting up something as an asset as collateral for the loan.
Unsecured bonds offer borrowers access to capital that they might not otherwise be able to get.
Some of the major risks are that they are not guaranteed to be repaid, they can lose value very quickly when compared with other types of investments, there is no collateral.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.