Loans that are not secured do not have a guarantee backed by an asset of comparable value like secured loan does. This means that debt which is unsecured carry more risk for creditors than a comparable secured loan. Thus a unsecured loan carries less of a risk for the borrower. Following this logic, unsecured loans are more costly for consumers.
Creditors that lend via unsecured loans set higher interest rates and sizable fees that the borrower will have to pay. The lender asks for more to hedge the increased risk involved in investing in unsecured debt. If the borrower does not repay the loan as agreed creditors will not be able to seize or collect any type of collateral if the loan is no secured by an asset.
The comparably higher risk associated with unsecured debt derives from two fundamental notions.
- The borrower will elect to pay secured debt before unsecured debt.
- There is no collateral guarantee to hedge the risk of default.
Types of Unsecured Loans
Below you can find a list of typical unsecured lending products
- Personal Loan
- Credit Card Accounts
- Peer to Peer Lending
- Debt Consolidation Loan
- Store Financing Loans
- Some Small Business Loans
- Some Corporate Loan Debt