Unsecure loan is a loan granted by a lender purely based on your credit worthiness without using your asset as collateral or security. What is needed is simply your signature on the dotted line.
A common assumption is in an unsecure loan when you default your payments a creditor could not attach your asset like your house if you own one. Said assumption is far from the truth.
While an unsecure creditor may not be able to seize your assets as quickly as a secure creditor when you default on your payments, an unsecure creditor, however, could sue you in court to secure judgment against you that could be used to attach your assets including your house.
A good illustration was a couple who jointly owned a house which has a big equity. Both husband and wife had good income and had perfect credit rating. The husband thought of operating a part time business from home. He applied for an unsecure line of credit from his bank. Having good income and good credit rating, the bank approved his application for a $25,000.00 unsecure line of credit without requiring his wife to co-sign.
Time passed by, the husband’s part time business did not prosper as he expected, not only that, he was laid off from his job for the company he was working was in the process of downsizing. As a consequence, he was unable to pay the monthly minimum payments on his line of credit.
He requested his wife to refinance their house to get some of its equity to pay off the outstanding balance of his line of credit. His wife however, did not agree. She reasoned out that the loan was unsecured why they have to use the equity of their house to pay an unsecure loan. She believed that in unsecure loan a creditor could not attach the asset of the borrower who is on default.
One day the husband received a statement of claim from the court initiated by his creditor-bank. He had no defense at all on the claim and the court rendered judgment against him on the outstanding balance plus legal cost and other related expenses. As a result of the judgment, the creditor-bank was able to attach the couple’s house and ultimately the wife agreed to refinance the mortgage of their house to pay off the judgment amount.
In the above case scenario, it illustrates that it is a wrong assumption that a creditor could not attach your assets when you default payments on your unsecure loan. You do not need to wait for a creditor to go to court to secure judgment before you act, for it would be costly, as you would pay extra for the legal cost and other related expenses in addition to the outstanding balance of your unsecure debt.