Unsecured loans are labeled as 'high risk' loan types by lenders since there is no collateral tied to the loan. If you are unable to make your payments and end up defaulting on your loan, the lender is not protected financially. However, you still will be faced with consequence for defaulting.
Impact On Your Credit
Thirty days after defaulting, your credit is going to begin to be negatively impacted. After 60-90 days, you can expect your credit rating and score to drop even more with your debt being turned over to a debt collection agency at that time. Even if you only owe a small amount on your loan and have been paying timely for months or years, your credit score will be impacted and your debt sent to collections once a default occurs.
Since unsecured loans have no collateral tied to them, borrowers can expect pretty harsh penalties for being late with their payments. As soon as you are late thirty days on a payments, you can expect your interest rate to increase. And then each consequential thirty days late, fees will rise again. And it is important to note that even if you rebound and make up the payments you are late on and catch up on your loan, you are still going to have to pay the higher interest rate from initially being late. And if you default on your loan, and your debt is sent to collections, you may be obligated to pay the entire owed amount plus interest at that time no matter the length of time left on your loan contract.
Once default occurs on a secured loan, the lender will come and take possession of the property securing the loan. They will then liquidate that property for intent of recouping the monies owed. On the contrary, unsecured personal loans do not have collateral tied to them. Lenders are not going to fade away when you default on your loan. They are going to want their money. If you owe a substantial amount ($70,000+), the lender may select to take you to court. It will be up to a judge to come to a decision as to whether or not you have sincere reasons for defaulting on your loan. Examples of sincere reasons for defaulting can be a loss of job, or some sort of situation like an illness that prevents you from working. In the event that there is unanticipated and unavoidable situation that has triggered your defaulting, the judge's decision will likely be in favor of the lenders with you being required to pay the total owed amount back.
It is also possible that your salary will be garnished if a lawsuit is ruled in the lenders favor. This would be a guarantee that you are paying back your court-ordered debt. A court ordered debt is also called a 'senior debt'. A senior debt is the same as owing money to the IRS...meaning you have to pay it. And even a worse case scenario is that your personal assets are ordered seized and liquidated for the purpose of settling your debt.
An unsecured personal loan is legal binding contract. If you default, expect the consequences detailed above to effect you. Do not take out a loan if you do not think you are going to be able to repay it. If you are unsure how much you can afford, use our personal loan calculator for computing potential payments.
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