The lack of collateral implied on the word unsecured means that there is no particular asset guaranteeing the loan but that does not imply that the lender can not take legal action in order to recover the investment.
Of course, with secured loans, the legal actions are quick and expeditious. Foreclosure and repossession are legal tools that let the lender swiftly recover the money lent by either obtaining the possession of the asset used as collateral or coercing its sell in public auctions. Yet, there are of course other legal actions to be taken against a borrower holding unsecured debt in default.
Why People Believe Unsecured Loans Imply No Risk?
The source of this belief seems to be the concepts of collateral, repossession and foreclosure. Since unsecured loans carry no collateral, there is no property to repossess or subject to foreclosure. Therefore, people seem to believe that there is nothing to be lost. Many think that if a property is not used as collateral, then, the lender can not force its sell in a public auction.
Moreover, people also neglect to remember that even if the lender had no action against the borrower to recover the money (and actually there are other legal actions), the damage that the lack of repayment of an unsecured loan can do to your credit score and history is just as appalling as that of secured loans. And just for that reason one should avoid missed payments and late payments.
Consequences of Defaulting on an Unsecured Loan
The main consequence of defaulting on an unsecured loan is that your credit will be ruined. Your credit score will drop dramatically and the delinquency will remain on your credit history for a long time. However, that is not the only consequence of defaulting on an unsecured loan. Depending on the amount of debt, there are also legal actions that the lender may be willing to take to recover the money.
It is not that it is not possible to go to court for an unsecured loan, it is just that the process is longer and more costly in terms of legal fees and costs but if the amount of debt is high enough the lender will probably pass the debt to a collection agency and they will use all the legal tools in their power to recover the investment.
True Risks Of Unsecured Loans
As you can see, it is not true that unsecured loans represent no risk for the borrower. They certainly represent a higher risk for the lender and probably a lower risk for the borrower. Yet, there are risks associated to taking any kind of debt. And those risks need to be pondered before deciding to borrow money.
Unsecured loans provide financing with no collateral but although there is no particular asset attached to the debt, all your assets are guaranteed the debt. There is no single speed speedy legal action to claim the money but there are legal actions that the lender holds in case of default. And remember also that your credit history and score are at stake too. Smart borrowing dictates to only take a loan if you are sure you will be able to repay it or refinance it if things go wrong.