A Quick Look at the Risk Involved in Lending Practices

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Unsecured loan

In the world of finances and lending, most Americans have the tendency to shy away from any sort of agreement that seems too risky or which comes with long-lasting, expensive consequences. To be fair, plenty of Americans are well-versed in finances and are willing to consider high-risk financial agreements; but on the other hand, the majority of people don’t really understand the fundamental natures of things like loans and mortgages, and therefore they don’t understand what makes one type of loan riskier than another type.

On the most basic level, loan agreements from direct lenders can be either secured or unsecured loans, depending on whether a certain amount of collateral is involved in the agreement (‘collateral’ being a specific item or property, belonging to the borrower, which will automatically become the property of the lender if the borrower defaults on his or her loans payments). Unsecured loans, also known as “signature loans” at times, are much riskier for the lender because there’s no collateral involved — the only assurance that the borrower will pay back his or her debt is, literally, just his or her signature on an official document.

Secured loans, on the other hand, are much safer for lenders, because the lender is legally entitled to the pre-specified collateral if the borrower doesn’t repay the debt in full. There are many different categories of secured loans, but recourse loans and nonrecourse loans tend to be the most common categories; both types of loans involve collateral agreements, but the types of property that a lender can seize (should the borrower fail to repay the debt), in a non recourse loan agreement are much different than what can be seized in a recourse loan. Generally, non recourse lenders are a bit harder to come by, since lenders often prefer recourse loans and borrowers often prefer non recourse agreements.

Ultimately, any time money transferring is taking place, there’s going to be a certain amount of risk involved, no matter what. But with a little bit of research, patience, and organization, it’s possible for anyone to find the best loan agreement for their own individual needs, complete with the least amount of risk possible. Continue reading here.


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