Unsecured loans: Lending money without any collateral

When it comes to loans and other financial products offered by banks and other organizations, there are different methods for such institutions to ensure and secure their investment or borrowed resources, in case clients fall into insolvency or default and payments as agreed stop coming for any reason given at a certain point.

For example, one way for institutions to have a guarantee on a loan is to require collateral—a policy where borrowers pledge some assets like a house, a car, or any other to support the debt to the bank. Like this, in case the client stops paying the loan, the financial entity will have the right to take possession of the related collateral, as previously established in the signed loan contract.

Specifically, loans that involve collateral are known as secured loans. Nevertheless, there are also types of lending procedures that do not include any collateral whatsoever, known as unsecured loans, and these have their own characteristics, purposes, and types, which will be addressed in the next paragraphs.

The definition of unsecured loans

In simple terms, an unsecured loan is a type of loan that a client or customer of a bank can obtain without having to provide any guarantee or collateral.

Because of this, unsecured loans cover limited amounts of money and can be quite fast to obtain, without the related requirements and paperwork other types of loans with a more complex nature may have.

Now, while unsecured loans are not backed up or supported by any other asset or guarantee in any way, this does not mean the borrower loses the responsibility to pay the loan in time and with related interests and fees included.

Legal actions banks take in default cases related to unsecured loans

In fact, while collecting money borrowed from clients in default may be difficult, banks and financial institutions can sue them, present a case where a breach of contract is demonstrated, and wait for the execution of a judgement over the client’s assets.

Furthermore, non-payment of an unsecured loan can result in a bad credit record or history for the borrower, which means the borrower’s chances of obtaining another loan, secured or unsecured, are almost nonexistent, because credit history is an important factor banks consider when determining clients’ suitability for loans and other financial products.

Types of unsecured loans

Unsecured loans have other sub-types of their own that are quite well known to almost everyone. For example, credit cards are unsecured loans that are handled through a financial instrument called plastic, which is offered by banks, and allow the user to enjoy a limited amount of credit that can be paid monthly.

In the same way, personal loans are another example of unsecured loans since these are offered by financial entities without the need for collateral or guarantees. Personal loans are typically provided automatically by banks, with funds deposited into the client’s bank account. Personal loans, like credit cards, must be paid monthly, and the bank determines the time limit for repayment.

Of course, there are other types of unsecured loans, like bank overdrafts, lines of credit, corporate bonds, and peer-to-peer lending.

Disadvantages of unsecured loans

Since unsecured loans do not provide any guarantee or support asset to the bank, amounts of money are limited and interest rates are higher; in fact, these are much higher in comparison to secured loans, even reaching 25 percent or more. As a result, unsecured loans are intended to cover small to medium-sized expenses or investments. 

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Naveen Rawat
Naveen Rawat

Naveen is a digital marketing expert. With his research on loanbuy.in, he helps people get up to date with the latest business, finance, and government schemes.

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