The Risks and Rewards of a Collateral-Less Personal Loan

Credit, in theory, is a relatively win-win situation.

You don’t have the funds to fork over for a certain expense, so a lender gives you that cash – so long as you agree to pay it back, plus a bit more. Although the latter requirement can be a bit of an annoyance at times, the truth is, being lent money when you need it most can be a sweet lifesaver.

Problem is, that credit reliance has become somewhat of an unfortunate addiction for many Americans. According to a recent report by credit bureau TransUnion, credit card delinquencies – arguably the most common kind of credit – were on the rise this quarter.

The report went on to state that average credit card debt per borrower was on the incline, rising from $4,996 per borrower from $4,762 in 2011’s third quarter reports. This finding comes paralleled with the recent studies revealing that the average American owns three separate pieces of plastic in their name.

It’s clear that many consumers have grown accustomed to a credit dependency, intended or not. However, it’s also apparent that most Americans may be biting off a bit more than they can chew when it comes to financing. And more often than not, they might benefit from a finite financial line and a set amount borrowed, rather than a seemingly limitless line of credit.

Unsecured personal loans, while bearing many similar traits to their plastic cousins, come with distinct terms and costs. But while these kinds of loans might be a viable alternative to a costly credit card addiction, they certainly don’t come complication-free.
What’s an Unsecured Personal Loan, Anyway?

Financial loans tend to come in two distinct flavors.

The first, a secured personal loan, relies on some kind of collateral to account for the risk of lending out cash. Essentially, this means a borrower would offer the title to a sizable asset to a lender, like a house or car, in the event of a default.

These are the least-risky kinds of loans for lenders. Although a borrower could default at any time, they’ll at very least have ownership of a sizable asset for selling in the worst case.

The second kind is an unsecured personal loan.

“Unsecured personal loans are defined as fixed-interest rate personal loans that require no collateral or security,” explained Adrian Nazari, founder and CEO of Credit Sesame. “These loans require less paperwork than other types of loans, and the balance of the loan is evenly distributed across a fixed number of payments.”

While they’re not near as common as credit cards for financing, as credit cards currently account for more than $2.5 trillion in transactions every year, unsecured personal loans remain popular with many consumers. According to the National Credit Union Association, Americans spent an estimated $25.58 billion last year on unsecured personal loans.
The Rewards

Although unsecured personal loans contain a certain amount of intricacies and variables, there’s one trait that tends to stand out in consumer’s eyes.

“One of the biggest advantages of getting a loan with no collateral attached is that if you default on the loan there is nothing the creditor can come after you for or collect, such as a car or home,” explained Leslie Tayne, a financial attorney and debt management/resolution specialist in New York.

In the event that a consumer defaults on his or her loan, there is, quite literally, nothing palpable that can be taken from them. And for a great deal of vehicle- or car-owning consumers that aren’t entirely willing to sign over the deeds to their assets, this financial security can be incredibly comforting.
The Risks

One of the most crucial components for consumers to weigh with their unsecured personal loans, however, is the tremendous risk that lenders are taking when they embark on a relationship with the borrower.

“Because these loans do not require collateral, they are riskier for lenders,” explained Nazari. “Therefore, these loans often have higher interest rates than secured loans.”

But, as Nazari went on to stress, those rates might still edge out similar forms of financing. “[Unsecured loans] are still pretty competitive with credit card rates.”

That’s not to say that unsecured personal loans come cheap. According to the Federal Reserve, the average 24-month unsecured personal loan last year was 10.52 percent, compared to 12.36 percent for a credit card. And according to Nazari, while those rates can sometimes flirt with the seven percent range, it all depends on the consumer’s creditworthiness when applying.

Although borrowers might be out of the water when it comes to losing an asset in a default, they can’t exactly make a clean break from a lender or bank should they fail to make payments. “Although there is literally nothing that can be ‘taken’ from you, there’s always the risk of getting sued by the creditor in the event that you default,” explained Tayne.
Questions to Ask Yourself Before Signing On

Before opting for either a secured or unsecured personal loans, borrowers will need to embark on a bit of introspect and financial assessment.

“Before taking out a loan, people should be asking themselves what their ultimate objective is for borrowing money,” explained Roger Cruise, executive vice president for Credit Vault Publishing. “You should be asking yourself: What is the maximum amount of money I can afford to borrow and pay-off within two to three years? Any longer than this time frame should make you pause as to whether your purchase is really a necessity.”

When considering an unsecured personal loan, consumers should always consider the gravity the loan holds. While you may not be offering your car or home to the chopping block, there are still a number of sticky situations borrowers can become entrapped in should they forgo or flub on payments.

“Understanding your budget is key in terms of knowing what you can afford to pay, and for how long,” added Tayne. “Simply going in for a loan blindly and backing into a loan payment is not financially smart.”…

How to Take Charge of Your Personal Finances Post-Bankruptcy

For many consumers, having a big, blaring bankruptcy on your credit report can feel like being branded with a rouge ‘A’ on the front of your shirt.

You’ve raised a financial white flag, proclaiming utter debt despair.

Though an immediate bankruptcy filing won’t bear the same public humiliation as it did for Hester in The Scarlett Letter, the financial and debt wounds many consumers are inflicted with still tend to slice deep. As if the events leading to the filing weren’t excruciating enough, with consumers being suffocated with mounds of credit card and unsecured personal loan debt, the scene can turn even grislier in the aftermath.

“Bankruptcy certainly is a taboo subject,” explained Kimberly Pelkey Sdeo, a New Jersey attorney. But although the process tends to be chastised, bankruptcy has been around since the country began.

“Bankruptcy has been around in some form since the birth of this country. Congress enacted the first bankruptcy laws in 1800, so we have a very long history of supporting some form of debt relief for those who are in over their heads,” she explained.

According to statistics from the Administrative Office of the U.S. Courts, 1,311,602 Americans filed for bankruptcy in the 12-month period ending in June 2022. And according to the American Bankruptcy Institute, almost 70 percent of the filings were categorized as Chapter 7, or “liquidation” bankruptcies. These kinds of bankruptcies tend to be options for consumers with no assets, little income, and a substantial amount of debt.

Bankruptcies ravage a credit score, plunging an average-to-good score by 100 points, or more.

But despite the havoc a filing will wreak on your credit score (not to mention your sense of financial pride), consumers will find no solace digging their shamed heads in the dirt.

“It is important to realize that there is life after bankruptcy,” stressed Erik Severino, attorney from the Guinn Law Group of Phoenix. “It does not have to be a life where you are treated like a financial outcast and banished to years of credit exile. On the contrary, life after bankruptcy can be enormously rewarding – but only for those who strategize and properly commit themselves to not wasting the second chance that bankruptcy can offer.”
Beginning to Pick Up the Pieces

Following a bankruptcy filing, consumers are likely to experience two immediate effects: a sense of shame or guilt, and a gaping credit score.

“One of the first things a debtor must do post-bankruptcy is to let go of the guilt and the shame,” explained Severino. “One must resolve to make peace with the past and let it go, not to dwell on negative thoughts or wallow in self-pity.”

For many downtrodden bankruptcy filers, this may be the most difficult step. But it’s crucial to accomplish quickly if you want to make any headway with your future finances.

“You [won’t be able to] own anything new for a while,” explained Wayne Sanford of New Start Financial Corporation. “At least not without a major price.”

Although a bankruptcy will allow a consumer to be discharged of his or her debt (for the most part), your name will be synonymous for risk with most lenders. Honing in on credit rebuilding will critical in the immediate months following the filing.

“Create and stay true to a reasonable and realistic budget, while also paying all bills on time. Your budget will act as a spending plan, helping you to manage cash flow and preventing you from racking up unnecessary debt,” Severino said.

For many consumers who’ve resorted to bankruptcy, the notion of taking on more credit would certainly induce some nerves. But according to Sdeo and Sanford, it’s a nerve worth overcoming.

The credit bureaus report a bankruptcy for 7-10 years after filing, but this doesn’t mean that your credit is shot forever,” Sdeo explained. “Bankruptcy offers a new beginning, a fresh start. After the court enters a discharge and closes a case, you are free to access credit markets again.”

“It is very possible to have a credit score of 700 just 12-14 months after filing chap 7 bankruptcy,” stressed Sanford. “Obtain 2-3 secured credit cards and utilize 20-30 percent of the credit limit… I have seen this and counseled many clients [on the subject] and it’s worked every time — as long as they pay the bills on time.”
Unsecured Personal Loans in Bankruptcy

For those that may have wound up in debt based from their plastic pals, relying on secured credit cards can be like asking an alcoholic to sober up with help from a bottle of O’Doul’s. In that instance, finite amounts of credit – like secured or unsecured personal loans – might come into play.

However, unsecured personal loans or secured personal loans in bankruptcy will come with some serious downsides. Lenders are likely to gawk at your score, matching you up with some horrendous interest rates.

But if you can manage the monthly payments, according to Sdeo, unsecured personal loans can be an option. But although the financial option is present, consumers will need to take the notion with a sizable grain of salt.

“It depends upon an individual’s circumstances and where he or she fits within the creditor’s guidelines,” she explained. “The interest rate may not be iWdeal. [But most importantly], the consumer should evaluate why the personal loan is necessary – did a car break down and need to be replaced or are you falling back into the spending and debt habits that initially caused you to file bankruptcy?”

The bottom line to any method of credit-rebuilding is timeliness. No matter what the line of credit is attached to, on-time bill payments in full will be the only guaranteed method for credit-repair.…