Unsecured loan risks: Is it worth it?

While writing about the difference between secured and unsecured loans, I have mentioned that the difference is in the collateral. This may lead some people to believe that, while there is the possibility for the bank to reclaim their property as the result of delayed payments of secured loans, there is no danger of that happening in case of unsecured loans. This is as far from truth as it could be.

The fact is that by signing the loan contract you are committing yourself to paying out the loan in full and on time. Depending on the terms of the contract, you can get financially quite badly hurt, if you do not pay off your loan.

If you take out a secured loan, and then fail to pay your instalments, the bank can easily take the assets you have put up as means of securing the loan, sell them, and use the money to cover its loses. In the case of an unsecured loan, the bank cannot easily and automatically take your assets, but in can (and will) take you to court and try in any way possible to replace the incurred losses. The consequences are not as immediate as in the case of secured loans, but they will come, you can be sure of that. 

If you fail to pay off your unsecured loan, the bank will firstlypursue any co-signer that has maybe co-signed the loan on your behalf. If a person is that good of a friend or that good of a relative to co-sign a loan for you, you shouldn’t repay that kindness and trust by putting that person in such an unenviable predicament.

If no one has co-signed your loan, the lender will go after your future earnings and even your assets, if you have any (your home, your car, any shares you might have or any other valuables). The fact that they cannot take them immediately and easily, does not mean that they cannot take them at all.

Bearing in mind the fact that it is quite easy to take short term unsecured loans, and that sometimes they have very high interest rates, people tend to get stuck with those kind of loans, eventually taking more and more, just stuck into trying to pay off the debts and most of the time never succeeding.

If you get stuck with a number of short term, unsecured loans, it might be the time to stop getting deeper and deeper into trouble, and try taking out a consolidation loan.