What Happens if You Default on an Unsecured Loan

Lenders who give unsecured loans have nothing to repossess if the borrower defaults. This doesn't, however, leave borrowers free and clear if they decide not to pay their debts. Unsecured loan lenders take specific actions if a borrower defaults on payments.

Collateral

Banks and lenders cannot take property for unsecured debt because the debt has no collateral linked to it. Even if the lender also holds a separate car loan for the borrower, it cannot take the car unless the borrower defaults on the car loan, according to the website NOLO.

Collection Agency

Some lenders turn their unpaid debts over to collection agencies. These agencies call borrowers, write letters and sometimes make house visits.

Legal Matters

Lenders sometimes sue borrowers who default on unsecured debt. Not only does this cost the borrower the debt balance, it also adds legal fees to the bill.

Credit Score

Defaulting on an unsecured loan lowers the borrower's credit score. This affects his ability to borrow in the future and sometimes raises interest rates on open lines of credit.

Credit Cards

Credit cards represent unsecured loans. Even though people use credit cards to purchase good and services, banks have no right to repossess those purchases if bills are unpaid, states NOLO.

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