Sara Routhier, Managing Editor of Features and Outreach, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming worl...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 2, 2012

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Depending on whether or not a personal loan is secured or unsecured, borrowers may forfeit anything from their credit score and money to a car title or even their home in the event of a default.

 

Lenders issue personal loans based on certain criteria, and if a borrower has a decent credit score and is willing to accept a higher interest rate, they can take out an unsecured personal loans. Unsecured personal loans provide no collateral to a lender, which is why they tend to cost a borrower more money in terms of interest rates. Secured personal loans, on the other hand, come with lower interest, but require a borrower to put some type of collateral—which often comes in the form of paychecks, car titles, or even their home’s equity.

 

Consequences of Default

 

Even though there is no collateral linked to an unsecured personal loan, borrowers need to be aware that there are still consequences. If a borrower begins missing payments their credit score will suffer a severe blow, and if a borrower falls into default, their loan will be turned over to a collection agency.

 

As soon as a collection agency gets involved, a borrower’s credit score will take another excruciating hit, and the borrower can then expect to be contacted by the collection agency who will demand payment.

 

Additionally, late fees will be tacked onto the loan amount. If a borrower continues to refuse payment, there is a very good chance a lender will file a lawsuit and attempt to gain rights to wage garnishment.

 

Secured Loan Carry More Risk

 

In addition to subjecting themselves to the same consequences as unsecured borrowers, secured loan borrowers carry the additional risk of losing their collateral.

 

Lenders are required to go through the proper legal routes of repossessing a piece of collateral, and before such a move is made, the borrower will receive a written notice explaining they are in default and what to expect. After that point, if a loan was backed by a possession, such as an automobile or a property title, the borrower can expect to meet either a repo man or a court-ordered foreclosure notice.

 

Because of this enormous risk, borrowers need to be sure they can pay a secured loan off before committing to this type of financing.