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Unsecured
Unsecured
Unsecured
By JULIA KAGAN | Updated Jun 15, 2018
What is Unsecured
Unsecured loans or lines of credit (LOC) are loans where lending happens without the backing
of equal value collateral. Collateral is property or other valuable assets which a borrower offers
as a way to secure the loan. In an unsecured loan, the lender will loan funds based on other
borrower qualifying factors. These qualifying factors include the credit history, income, work
status, and other existing debts.
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Unsecured loans and lines of credit (LOC) often have high-interest rates. These rates help to
insulate lenders against the risks of loss. The most common forms of unsecured funds are credit
cards and personal loans.
In the case of an auto, boat, or other large equipment loans, this process is repossession. In
both foreclosure and repossession, the borrower will lose the item which secures the loan.
Secured loans or debt have limits set by the value of the collateral offered. When it comes to a
home mortgage, a borrower may only receive a portion of the total fair market value of the
property. Auto, boats, and other loans also follow this pattern.
First, the surplus of houses led to lower overall home values. Because, like all products, more
demand commands increased prices, while more supply than demand forces prices
down. This drop in value caused the second shoe to drop. Homeowners seeing the worth of
their investment fall hoped to sell. Due to the amount of ready supply, they often found this
difficult, if not impossible to do. They, in turn, begin to default on their mortgages.
The banks reclaimed these properties and then found that they could not sell them either.
Some of those banks went under as a result, which provided an example of how even secured
loans can be risky business. Lending terms have changed dramatically since the 2006 housing
crash, and banks are now more conservative as a result.
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Related Terms
Security Interest
Security interest is a legal claim on collateral that has been pledged, usually to obtain a loan, that gives a
creditor the right to repossession. more
Unsecured Loan
An unsecured loan doesn't require any type of collateral, but to get approved for one you'll need good
credit. more
Deficiency Balance
A deficiency balance is the amount owed to a creditor when collateral is sold for an amount that is less
than what is owed on the secured loan. more
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Second Mortgage
A second mortgage is a mortgage made while the original mortgage is still in effect. Learn the
requirements for a second mortgage and how to apply. more
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