Unsecured Note Law and Legal Definition

An unsecured note is a note that is secured by a promise to pay. Hence, an unsecured note is not secured by means of any collateral to back it up in the event that the note is not paid. Unsecured notes are similar to debentures and carry a higher interest rate than secured notes. One of the best examples of an unsecured note is medical bills, as a person does not have to put up any type of collateral in exchange for having a medical procedure done. Such notes are also often uninsured, subordinated, and structured for a fixed period of time.

In general, for lenders and borrowers unsecured notes are risky. These notes are risky for lenders because they are placing faith in the borrower to pay them back. The notes are risky for borrowers because financial circumstances can change accidentally, and money that is there today may not be there tomorrow. Under an unsecured debt the personal property of a borrower who does not make good on her promise to pay an unsecured is not lost. But there is a very good chance that the bank or financial institution might take legal action against the borrower to cover its losses.