Unsecured Loan Definition
An unsecured loan is basically a loan issued without any collateral or guarantor, a loan released based on trust in the borrower. Unlike a secured loan which people qualify after meeting certain criteria, an unsecured loan is issued without any protection or collateralization of the borrower.
In most cases, unsecured loans are rampant between collaborator or colleagues who have developed trust in each other over a certain period of time. These are personal loans or signature loans in which the borrower needs not to have specific assets that the lender can hold on to in cases of failure to pay back or bankruptcy.
A Little More on What is an Unsecured Loan
In normal loan agreements, there are criteria that borrowers must meet before taking a loan, these include high credit ratings and availability of collateral. Contrary to a secured loan, unsecured loans only looks for borrowers with high credit ratings and creditworthiness. Unsecured loans pose major threats to lenders especially in situations here borrowers default the terms of repayment and no asset or collateral to hold onto.
Although, these loans have higher interest rates but they have bigger risks than loans secured with collateral and guarantor. In some cases of borrowers with low credit ratings, lenders in unsecured loans arrangement permit cosigners who agrees to pay off the debt if a borrower refuses to make payments.
Credit cards, personal loans, business loans and student loans are good examples of unsecured loans. In these kind of loan arrangement, the borrowers do not need any collateral before securing the loan. Unlike term loans where borrowers pay off debts at the end of its term, unsecured loans are revolving loans which can be spent, repaid and spent again.
Although, most term loans are related to secured loans, there are also specific cases where unsecured term loans can occur. A good example of unsecured term loan is a consolidation loan. Over the years, the rate of unsecured loans have grown as seen in cases of peer-lending, online or mobile lending and lending between colleagues.
Alternative lenders are substitute or non-standard lenders that offer loans without tangible collateral or guarantors.Online loan merchants are also examples of alternative lenders, although they request that borrowers pay a certain amount as down[payment. Unsecured loans often embody alternative lenders or payday lenders who offer credit cards, student loans or business loans without having collateral. Instead of having collaterals, alternative lenders activate some other measures to get repayment for their loans. They are non-bank lenders but they require that borrowers make repayment by agreeing to automatic withdrawal from their account.
Any type of loan, whether secured or unsecured witness borrowers defaulting on the terms of repayment. In cases of secured loans, if borrower default on repayment, the lenders, usually banks and other certified financial institutions can claim the collateral so that the debts can be repaid.
On the other hand, when borrowers defaults on an unsecured loan, since there are no collaterals to repossess, the lender can take the defaulter to the court or involve external parties or agencies. Court ruling determines what will be the lot of both the lender and borrower. For instance, the court might rule in favor of the lender and permit a lien to be place on the borrower’s property till repayment is made.
References for Unsecured Loans
Academic Research on Unsecured loan
The sterling unsecured loan market during 2006-08: insights from network theory, Vila, A., Soramaki, K., & Zimmerman, P. (2010).
The relationship between the overnight interbank unsecured loan market and the CHAPS Sterling system, Millard, S., & Polenghi, M. (2004).
Household’s optimal mortgage and unsecured loan default decision, Kim, J. (2015). Journal of Macroeconomics, 45, 222-244.
Interest rates and default in unsecured loan markets, Divino, J. A., Lima, E. S., & Orrillo, J. (2009, October). In 31º Meeting of the Brazilian Econometric Society.
State Ownership Corporate and Unsecured Loan: Government Intervention, Implicit Collateral or Information Advantage?[J], Chun, Y. (2010). Accounting Research, 8, 009.
Interest rates and default in unsecured loan markets, Divino, J. A., Lima, E. S., & Orrillo, J. (2013). Quantitative Finance, 13(12), 1925-1934.
Long-Run Performance of Redeemable Convertible Unsecured Loan Stocks (RCULS) and Irredeemable Convertible Unsecured Loan Stocks (ICULS), Abdoh, M., & Yaseer, W. M. (2007). (Doctoral dissertation, Universiti Utara Malaysia).
A Bayesian hierarchical model for unsecured loan Loss Given Default, Bijak, K. (2015).
The sterling unsecured loan market during 2006–2008: insights from network topology, Soramäki, A. W. P. Z. K. Simulation analyses and stress testing of payment networks.
Customer satisfaction survey of unsecured loan customers of BRAC Bank limited, Akhtar, J. (2012).
A model of complex equity funding for contingent acquisitions–a case study of non-interest bearing convertible unsecured loan stock, Hillier, D., & Marshall, A. P. (1998). Journal of Corporate Finance, 4(2), 133-152.
Convertible Unsecured Loan Stocks, Conroy, R. M.