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What Do Borrowers Risk with Unsecured Loans?

Obtaining an unsecured loan happens to be a bit more difficult than obtaining a secured one since no collateral is used to secure it. Since the borrower is not required to put up his home, if he has one, for collateral, does that mean that he doesn't have to worry about paying the unsecured loan back? Is all of the risk on the side of the lender or does some of it belong to the borrower?

No Collateral - No Risk?

Unfortunately, the common misunderstanding that no collateral means no risk for the borrower is just that- a misunderstanding. At the very least, the borrower places himself at risk for developing a very bad credit history if he chooses to default on an unsecured loan. Even late payments will produce a negative effect on a borrower's credit history, reducing his credit score and increasing the difficulty of securing future financing.

Plus, the lender has every legal right to pursue the borrower for repayment of this loan. Just as it was harder for the borrower to get the loan due to his lack of collateral, it will be harder for the lender to get repayment of the debt should the borrower default. This is the downside for the lender. With an unsecured loan, the lender does not have access to the tools of repossession and home foreclosure with a swift turnaround on the debt repayment. Instead, he must take the slow but steady path that will lead him to compensation.

Borrower's Risk

Therefore, the borrower, like it or not, has placed himself at risk despite the fact that he never put up any collateral for this loan. If the borrower does own property and he defaults (fails to pay) on an unsecured loan, the lender has the right to attempt to force the borrower to sell this property.

Plus, the lender also has another option at his disposal, one that places the headache in someone else's hands. Lenders always have the option to hire the services of a collection agency. The larger the debt that needs to be repaid is, the more likely it becomes that a collection agency is going to take over and pull the strings to orchestrate repayment of the debt. So, even though it might not be quick and easy, a solution to recouping unsecured debt can be found and used to show the borrower that he does indeed need to repay his debt despite the fact that he never put up any collateral.

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