What You Need To Know About Unsecured Loans

When you need to borrow money, you can either take out a secured loan or an unsecured loan. Each loan has different advantages, but in the case that you default on your loan, you are much better off with unsecured loans. Read on to learn more about unsecured loans and how they work.

When you take out a secured loan, you have to put something down as collateral for the loan. This could be house, your car, business equipment or other property that is worth as much as or more than the loan you are taking out. A mortgage, for example, is a secured loan. Your house is the security. If you don’t pay your mortgage, the bank can come and take your home. The security instrument protects the lender in case you default on the loan.

An unsecured loan, on the other hand, has no security instrument tied to it. If you don’t pay the loan back, the lender can’t take anything from you. The lender has no recourse. Since lenders have to absorb more risk with unsecured loans, the interest rate is often higher on them. The lender doesn’t know if you will pay the loan back or not, so the higher interest rate acts as a protective mechanism.

While the lender can’t take anything back if you don’t pay off your unsecured loan, they can still send your unpaid loan to a collection agency. The collection agency will hound you with phone calls and letters. They could even contact your boss and your family. If you don’t set up a payment plan with the collection agency, you could get sued.

If the lender wins the lawsuit, you could end up with a lien slapped on your house and the lender could even levy your bank account and drain it. A successful lawsuit can turn an unsecured loan into a secured loan, especially if you own a home. If you take out a loan it is crucial that you pay it back. While many lenders don’t take to the courts to settle unpaid loans, some of them do and you don’t want to take the risk.

If you are going to take out an unsecured loan, just make sure that you can pay it back in a reasonable amount of time. Don’t risk any problems and make sure to pay the loan back on time.

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