Unsecured Loans Going to Hurt You
by David C Terr
Unlike secured loans, which are guaranteed (secured) to the lender with an asset or lien, unsecured loans are not guaranteed, so the borrower is not at risk of reposession. Large loans like house or car payments are typically secured loans. Typical unsecured loans include credit card debt, bank overdrafts and personal loans. Interest rates are usually higher on unsecured loans than on secured loans and the loan amount is usually less.
Credit Card Debt
According to CardWeb, the average credit card debt among Americans with at least one credit card rose from about $3000 in 1990 to around $9000 in 2002. However, Liz Pulliam Weston [1] points out that these figures are misleading for several reasons. For one thing, in 2002, 23.8% of American households did not have a credit card. Furthermore, anotther 31.2% of American households, who did have at least one credit card, owed nothing. Thus 55.0% of American households had no credit card debt in 2002. Among the remaining 45.0%, most owed $2000 or less and all told, only about 1 in 20 American households owed $8000 or more. Nevertheless, she warns that many of these Americans are in serious trouble, since most of them do not have high household incomes, and a record number of bankruptcies were reported in 2003.
Bank Overdrafts
An overdraft occurs when a customer's withdrawal exceeds his balance. This typically occurs if he writes a check for more money than he has in his account, i.e. a rubber check. When this happens, the customer's debt becomes a bank loan, which typically gets charged with high interest and possibly an additional fee. Banks offer overdraft protection as a means for the customer to avoid paying the penalties associated with overdrafts. There are several forms of overdraft protection, including overdraft lines of credit, linked accounts, and bounce protection.
Sources: "MSN Money",
http://moneycentral.msn.com/content/Banking/creditcardsmarts/P74808.asp
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