Unsecured personal loans can provide you with much needed financial assistance even in the absence of collateral. Many borrowers prefer this option because, technically, it poses lower risks on the borrower. However, since there is no collateral involved, lenders can only use the borrower's credit rating as basis for the loan. This is very risky for the lender and because of that, interest rates for an unsecured personal loan can be very high.

Defaulting on any form of unsecured personal loan, particularly a bad credit unsecured personal loan, can affect you in more ways than one. It can damage your financial and personal credibility as well as get you into legal trouble. Let's go over some of the dangers of defaulting on an unsecured personal loan.

Finance Charges

Oftentimes, unsecured personal loan poor credit providers or banks may impose certain special penalty fees on delayed payments. Usually, these fees increase for every month that the borrower neglects to pay and this could reach exponential proportions if the borrower isn't careful. The longer the debt remains unpaid, the larger it gets, because of the accumulating fees and interest.

Damage to Credit Score

As a borrower defaults from an unsecured personal loan, his credit score drops significantly. It starts if the loan remains unpaid 30 days past its due date. Greater drops in score will occur on the 60th and 90th day that the loan remains unpaid. When this happens, a collections agency is summoned to collect the debt. The lender will then assume that the borrower has defaulted and his credit is set to the lowest value possible.

Lawsuit

In a secured loan, should you fail to make payments even after a collections agency contacts you, the lender will reserve the right to take away the collateral from you and either liquidate it or keep it to pay off the loan you borrowed. In an unsecured personal loan, there is no collateral involved; so what can the lender take away from you? If the amount you borrowed is large enough, the lender can take the case to a judge who will then determine if you, the borrower, has an excuse legitimate enough to get the loan dismissed (i.e. medical problems, loss of employment, calamity). Should the judge find your reason to be unsuitable, you will then be required by law to pay back the loan or else face criminal charges.

Garnishing of Wages

Through a court order authorizing wage garnishment or forced liquidation of assets, the lender gets assurance that borrower pays back the loan. If the borrower doesn't live up to his end of the deal, his wages will be forcibly taken from him or his prized assets (i.e. car, appliances or house) will be taken and liquidated.

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