Risk With Unsecured Loans

Risk With Unsecured Loans

Risk With Unsecured Loans - Guide To Unsecured LoansIn simple language, it can be said that unsecured loans are the loans that are provided by the lender without taking any type of security. For the borrower, getting an unsecured loan is a pleasant feeling as none of his or her asset is under risk.

However, there are certain aspects related to unsecured loans that have to be understood. Since lender has no security available with him or her, in case the borrower does not repay the loan amount, no recourse can be taken by the lender.

Lender is at a risk of losing the entire outstanding amount. Taking such a risk into consideration, lenders increase the cost of loan, which actually is the interest earned.In other words, in case of unsecured loan, lenders charge high interest rates so that they can compensate for the risk taken by them.

For the borrower, especially the borrowers that like to follow the agreed repayment plan, this is not a good situation. Despite the fact that loan would be re-paid in installments, they have to pay more money. If this increase in the interest is calculated with reference to the entire loan period, it may be in thousands of dollars in certain cases.

Second important aspect is the margin. Lenders would definitely increase the margin requirements so that the contribution from the borrower increases. For example, if a lender asks for a 10-15% margin for secured home loan, it would definitely ask for a 20-25% margin for the unsecured home loans.

In many cases, people are not able to arrange the required margin and thus, have to forego their decision of taking the loan. In case of personal loans where borrower can fulfill any objective from the loan amount, maximum amount of loan offered decreases in lieu of margin requirements. In any case, burden on the pocket of borrower increases.

Repayment period attached with the unsecured loans is also short. This is because no lender would like to extend re-payment period, in cases, where his or her money is at a great risk. Lender would like to square accounts as soon as possible. Short repayment period means increased monthly installments.

This also increases the burden on the borrower to a good extent. In case the borrower defaults, not many options are available with the lender. Thus, unsecured loans are not among the most liked portfolio of lenders too.

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