Unsecured debt is a loan without a guarantee to back the loan, while a secured debt is a loan against physical property, such as a car or home. Unsecured debt is higher risk for the lender. Interest charges on unsecured debt are generally higher than secured loans because of the increased risk. Although there are various kinds of unsecured debt such as student loans, the most prevalent in the economy are credit cards.
Late Charges
When you don't pay an unsecured debt like a credit card, you will most likely be charged a late fee. The credit card company may freeze your account until you make a payment, or in some cases, until you pay off the entire balance. You may also find that your credit card company will increase your interest rate or lower your credit limit. Different banks and credit companies have different policies. Check your original agreement for details of a particular unsecured debt.
Collection
Once a significant amount of time has passed without a payment, the lender will most likely begin to make phone calls to request payment. Generally lenders will begin to call after 90 days without receiving payment. Legally, a lender can call you as many times a day as the lender wants on any day of the week between 8 in the morning and 8 at night. The lender may use a subcontractor to make these calls. People who make collection calls work on a commission, so they can be very persistent and annoying in the hope you will make a payment.
Third Party
After anywhere between 90 days and a year, a lender writes off the loan as a loss. The lender sells the debt to a third-party debt collector. The sale of the debt is pennies on the total amount. An unsecured loan for $1,000 can be bought for as low as $10. The debt collector is legally entitled to receive the full $1,000 from you. Third-party debt collectors are aggressive. Some use unethical and illegal means to try and get you to pay. Some will offer you a repayment programs. Others will negotiate on the total price you have to pay them.
Long Term
An unpaid unsecured loan does not go away. It may continue to be sold off to other debt collectors in perpetuity. Your credit rating will sink as the lender and the debt collector will report you to credit bureaus as a "deadbeat." For larger sums, the debt collector may take you to court to sue you for the amount. Once a court designates you a debtor, this will stay on your credit rating for seven years and the collector can seek garnishment of your wages or freeze your assets. These legal actions can force you in to bankruptcy.
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