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Unsecured Personal Loan Interest - Why is it higher
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There are two kinds of loans out there that people will often run into. Secured
loans and unsecured loans are very different and come with different interest rates,
too. People looking for credit card debt help will note that their cards are a form
of unsecured loan and thus come with a higher interest rate. So why is the rate
higher on an unsecured personal loan?
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Secured loans and collateral
A secured loan is one that's held down by a piece of property. In a sense, this
is like the old bartering system where people put down collateral on their loans.
Instead of leaving your watch, though, you are leaving your physical home. These
loans include things like mortgages and home equity lines of credit. They are "secured"
in the sense that if the borrower defaults on the loan, the lender can simply take
back the property. This makes the loan a much better bet for the bank because they
won't lose all of their capital if a person defaults.
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Unsecured loans
These are loans, like personal loans or credit cards, that simply rely upon a person's
credit report and a person's implied promise to pay back the debt. Because there
is literally nothing tangible attached to the loan, the creditor takes on a tremendous
amount of risk. The only true incentive to pay for a consumer is the possibility
of being sued and the fact that credit reports exist. Though most people will pay
their loans, a large enough portion of the population will default that it makes
sense to charge a higher interest rate.
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