Unsecured Loans

RECENT NEWS
Wall Street Journal  Oct 9  Comment 
These personal loans can be particularly useful to pay off costly credit-card debt.
Wall Street Journal  Sep 29  Comment 
South Africa is grappling with rising defaults on a mounting pile of unsecured personal loans, high-interest-rate debt not backed by collateral like a house or car.
Reuters  Oct 24  Comment 
Unsecured loans in South Africa surged by 21 percent to $43 billion in the year to June, the central bank said on Wednesday, as banks in Africa's top economy continue to plough into the profitable and potentially risky market.
The Hindu Business Line  Mar 25  Comment 
The Finance Ministry has thrown a wet blanket on public sector banks' tendency to ‘accommodate' public sector undertakings and large companies by giving them short-term, unsecured loans. ...
BusinessWeek  Jan 31  Comment 
FirstRand Ltd. Chief Executive Officer Sizwe Nxasana said South Africa’s second-largest bank is focusing on unsecured loans to consumers as cash-hoarding companies have limited borrowing needs.
BusinessWeek  Jan 27  Comment 
FirstRand Ltd. Chief Executive Officer Sizwe Nxasana said South Africa’s second-largest bank is focusing on unsecured loans to consumers as cash-hoarding companies have limited borrowing needs.
BusinessWeek  Jan 26  Comment 
FirstRand Ltd. Chief Executive Officer Sizwe Nxasana said South Africa’s second-largest bank is focusing on unsecured loans to consumers as cash-hoarding companies have limited borrowing needs.
The Economic Times  Dec 6  Comment 
Reliance Commercial Finance has prepared a strategic plan to completely move out of the unsecured lending business.




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Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.

Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.

12 month loans

Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.

Commercial Paper is a notable unsecured loan.

Examples

  • A man faces an unexpected, immediate expense (perhaps he suffers a medical emergency) and needs to procure money immediately. Because he has excellent credit, he is able to procure a short-term unsecured loan from his bank to pay for his expenses.
  • Two friends are going to a football game. One of them has left his wallet in the car, a fact which he does not realize until they reach the ticket window. The friend who still has his wallet pays for both tickets on the condition that the wallet-less friend reimburse him as soon as they reach the car. As no collateral was offered, this is an unsecured loan.

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