How Unsecured Loans Are Turned into Secured Ones by Loan Sharks
Most consumers who take out unsecured loans are not financial experts. In fact, they know little about borrowing and lending. That is why it is easy for them to fall into the trap of loan sharks, illegal lenders that charge sky-high interest. They can easily turned an unsecured loan into a secured one and seize your property. Find out how they do it and how to protect yourself.
Unsecured vs. Secured
It is important for you to understand the difference between unsecured loans and secured ones. When a loan is unsecured, it does not involve the use of collateral or surety. The borrower is granted money based on the fact that they earn a salary, which they will use to repay their debt.
Secured loans, on the other hand, require the placing of collateral. The idea is that the borrower agrees for a lender to seize their property if they are unable to repay their loan. Of course, this does not happen automatically when the lender is legitimate. The court has to approve of it first. The idea behind using collateral is that the borrower will get lower interest and be motivated to repay their debt given the consequences they will face in case of default.
Loan sharks offer primarily unsecured loans. However, they set such high interest and fees that they make it extremely difficult for borrowers to repay their debt using their salary. In fact, the monthly instalment may be as high as the borrower's salary and even higher.
When the borrower goes and asks for loan extension, they are generously granted one but the interest and fees become even higher. In this case, the lender can offer to lower them if the person places their car or home or another valuable asset as collateral. If the person agrees, their loan becomes secured and they may lose the asset in case of default. The risk of this is higher given the illegal practices of loan sharks.
The conclusion is simple - stay away from unsecured loans offered by loan sharks.