Personal Loans Articles

Unsecured Loans: The Myth Of No Risk For The Borrower

There is a common myth, or misconception, that with unsecured loans there is no risk to the borrower. This incorrect concept stems from the fact that unsecured loans usually have no set asset being used as collateral for the loan. While there is no actual asset which guarantees the loan repayment to the lender, this does not mean the lender can't pursue proper legal actions to reclaim the amount borrowed. The concept that since a loan is an unsecured loan there is no risk for the borrower is an incorrect assumption.

The difference between secured loans and unsecured loans for the borrower, other than no risk being apparent, is that it simply takes the lender longer to reclaim the investment if the loan goes into default. This is because the lender cannot force a sale or foreclosure of any particular item to regain the amount lent; although there are other methods which can be used to force the borrower to repay a loan in default.

Why Believe The Myth

What has brought about the myth that there is no risk to the borrower with an unsecured loan? Here are a few ideas:
  • The concepts of collateral, repossession and foreclosure.
  • Inadequate knowledge of credit laws.
  • The misconception that if an item is not involved in the loan, it cannot be ordered sold to satisfy the debt.
With the belief that there is no risk for the borrower of an unsecured loan, there is also the belief that there are few legal methods available to the lender to recover any losses. Here are a few ways a lender can use:
  • Wage garnishment.
  • Sheriffs sale of any property to satisfy the judgment.
  • Lawsuits.

The Consequences With Default

When it comes to unsecured loans, seeing no risk for the borrower is a dangerous thing. The consequences associated with defaulting on an unsecured loan are just as serious as those for a secured loan, and most often are the same.
  • Your credit score will drop substantially.
  • The default will remain on record for seven years and can be renewed by the lender.
  • Defaulting on any loans will increase insurance premiums, security deposits, down payments, and minimum amounts due.
  • Defaulting on loans can affect the ability to obtain certain property or employment if you are seen as a credit risk.

The Truth About Unsecured Loans

The truth about no risk with unsecured loans for the borrower is that there is still risk. While the risk is greater for the lender, it is still there. Here are the true facts about unsecured loans.
  • There is no single asset assigned to the loan.
  • Any asset can be forced into sale to satisfy the loan.
  • Legal action may take longer with unsecured loans but is available.
  • Unsecured loans carry as much weight as a secured loan.
  • Defaulting on unsecured loans can cause equal damage to credit as a secured loan.
  • Any court will find in favor of the lender whether there is a secured asset or not.
Before borrowing any money, be sure of the consequences and the ability to repay. Secured or unsecured loans having no risk to the borrower is not a reality. Unsecured loans simply mean a higher form of risk for the lender, but also a greater responsibility on the part of the borrower as well. With unsecured loans, there is more trust in the ability to repay; if the loan is mishandled the lender will be more likely to pursue the borrower with any legal means available to them.