By David Baron
Birth of the Unsecured Loan
Contemporary banking corporations have come a long way. A century ago, almost every loan made by a bank was required to be a secured loan. In other words, the debtor had to have something of value to offer as collateral for the money borrowed. This obviously involved less risk for the lenders, although even in a foreclosure or repossession, the lender often took a loss.
As time went by, and bankers noted that there was a huge market “out there” for those persons who did not own property, but who also had the potential to make an honorable loan if they had the opportunity, the concept of unsecured loans was birthed.
Benefits and Disadvantages of Secured Loans v. Unsecured Loans
Most secured loans are protected by collateral, and this is obviously the most common form of home mortgage. Practically every automobile loan is of a secured nature. Every consumer has heard the horror story of the repossessed fancy car, and some may have even experienced it.
However, secured loans often provide more confidence to the lender and to the borrower. Although a consumer stands to potentially lose their collateral should they default on the loan, they still have the security of knowing that most of the debt can be recovered.
Lending institutions, and especially credit card issuers, take much more risk in issuing unsecured loans, but they pass this additional risk on to the consumer in the form of higher interest rates. Unsecured credit cards almost always have interest rates and fees for late payments or credit limit overruns.
Although these loans often are very punitive to consumers who fall upon hard times, they are also easier to find loopholes and possibly leave a bad debt with just a damaged credit record.
Resources for Bankers and Borrowers
Our Coachella Valley corporate attorneys can be a resource to answer questions and concerns should you fall prey to predatory lenders who either try to seize collateral without just cause. They may be able to assist clients who are being harassed by lenders who are becoming overly aggressive with their collection attempts.
Be an informed consumer. Study your options before borrowing money. It will be time well spent.