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Unsecured Loans Explained – What Happens if You Don’t Pay Them Back

date December 17, 2020 time 4 min read 1929 views

If you don’t like signing away your assets, an unsecured loan can seem like an obvious choice. But as you’ll soon find out, the consequences of failing to make your payments can be just as dire.

Debt is a huge problem in the US these days.

Studies show around 25% of millennials didn’t understand their student loans when they took them out. And 40% of Americans don’t know how their credit score is determined.

Unsecured loans like student loans and credit cards can seem harmless at first. You get free money now and at some distant point in time, you have to pay it back. 

What most people don’t realize is that you usually should start paying back quickly or risk being in debt for the rest of your life.

We’ll outline what unsecured loans are and what happens when you don’t pay them back.

What is an unsecured loan?

Unsecured loans are everywhere — if you have a credit card, you already have (at least) one ready at all times.

Unsecured loans are defined as loans that don’t require collateral like a house or car to use. Creditors can’t liquidate your assets if you don’t make your loan payments like they would if you had a secured loan.

Examples of unsecured loans include:

  • Credit card loans
  • Debt consolidation loans
  • Student loans
  • Business loans
  • Other personal loans

Instead of collateral, creditors judge how likely you are to pay back using other factors like your credit score; a number between 300 and 850 that determines how reliably you’ve paid back your debts in the past. If you have no or poor credit history, it will be tougher to get accepted.

That’s the gist of things — but there are different types of unsecured loans, and every lender has a slightly different offering and approach.

The meaning of an unsecured loan is credit given based on a signed agreement to repay
The meaning of an unsecured loan is credit given based on a signed agreement to repay (source:

Where to get an unsecured loan

If your credit score is fine and you’re confident you’ll pay your loan back, an unsecured loan might sound like a good deal. So, where can you get one? 

There are three main options.:

  1. Banks: Banks are the most traditional loan providers, and can be a great option for those with good credit scores.

But they’re no longer the only option. 

  1. Online lenders often have lower interest rates and different measures for credit scoring than banks but source their funding from the same sources.
  1. P2P lenders go one step further by letting peers fund each other. They give access to those who would traditionally be rejected by other institutions.

But perhaps more important than knowing where you can get an unsecured loan is knowing whether you should. Is an unsecured loan a good idea? 

Truth is, it depends on your situation — including your credit score and what you want to use the loan for. 

But one thing you shouldn’t assume is that you can pay back the loan whenever you feel like it. You can be in for a world of hurt if you don’t read those terms you sign carefully.

Online loans are becoming increasingly common today
Online loans are becoming increasingly common today (source:

What happens if you don’t pay back an unsecured loan?

When you don’t have any assets on the line, you might be confused at exactly what happens when you miss unsecured loan payments. It’s not like a lender can turn up at your house and threaten to steal your dog if you don’t pay them back!

But there are some very real consequences for not paying.

Immediate consequences

The most obvious consequence is damage to your credit score, making it much harder for you to take out more loans in the future, including credit cards and mortgages. 

Most lenders will also hit you with late payment or missed payment fees. In fact, many lenders will begin compounding your debt exponentially with every missed payment.

Of course, in theory, you could pretend your credit score doesn’t matter and refuse to pay the fees (please don’t do this). Then what?

Long term consequences

If you continuously miss your payments, you’ll end up in default. At this point, the lender might pass your debt on to a debt collector, an entity that will pursue you more intensely than the loan provider.

Although there’s a limit to what they can do, expect regular phone calls — perhaps even multiple times a day — and letters. Eventually, this could even lead to the next stage: a professional debt collection law firm filing a lawsuit.

This has a number of negative consequences:

  • A stain on your credit score for up to 10 years
  • Bank account levies (frozen bank account)
  • Garnishments (directing a third party to seize assets, wages, or savings)
  • Bankruptcy 

However, there’s some variation depending on the type of loan you have. For instance, student loans come with a promissory note, which is effectively collateral. 

Basically, if you learn anything from this article, let it be this: always pay back your debt, even if you have an unsecured loan.

And these days there are a lot of better options for secured loans that don’t require thousands of dollars in assets…

We’ve all been tempted to pretend debt doesn’t exist, but it’s not recommended
We’ve all been tempted to pretend debt doesn’t exist, but it’s not recommended

Get great rates and terms by securing your loans with digital assets

Secured loans can be a pain, but they do tend to offer lower interest rates than unsecured loans. Considering that you’ll end up having to pay for your loan one way or another, a secured loan is often the most sensible option.

At MyConstant, we offer a new type of secured loan. One that lets you use digital collateral: i.e. cryptocurrencies. Through our platform, you can unlock the value of your crypto investments instead of using physical assets as collateral that you probably want to keep around (like your car or house).

Our crypto-backed loans let you borrow starting at just 6%. Even better, we don’t judge you by your credit score, so you don’t need to worry about facing a higher interest rate because of your history.

Make your assets work for you to get a great rate on a speedy loan today with MyConstant. Sign ups are free.

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George Schooling

George Schooling

Invite friends and you both earn 10 USDT when they first lend stablecoins or make a crypto-backed loan

Tags: what is an unsecured loan unsecured loan meaning types of unsecured loans examples of unsecured loans is an unsecured loan good unsecured loan

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