Bad Debt Unsecured Loans
If you get yourself into a position where you need to get hold of low to medium amounts of money quickly, an unsecured loan could be exactly what you are looking for. These loans are great for those who are confident enough to be able to consecutively meet the monthly repayments on their loan. Conversely these sorts of loans can put banks and building societies into a risky situation because they are open to becoming bad debt.
Bad debt is debt that a company or bank writes off as unable to collect. This differs from the normal definition of debt which is seen as something which is going to be repaid eventually. In relation to unsecured personal loans, bad debt can occur if a borrower defaults on their payments and is no longer able to repay their loan. After the bank and building society has explored all possible options to get that money back and has failed, they would label the debt owed to them as bad debt because they are unable to reclaim it.
To make up for this risk, banks and building society will require their potential borrowers to have a good credit rating. If you have a good credit rating it means you have had a good history of repaying your debts and meeting all other financial obligations. A good credit rating shows a financial institution that you are stable and are likely to pay them back their money. This serves as assurance to a bank or building society when issuing out an unsecured loan.
High Interest Rates
The other thing that banks and building societies do to make up for the risk they are exposing themselves to when issuing out an unsecured loan is setting high interest rates. By setting high interest rates on their unsecured loans a bank is making it more worth their while to lend it to you because of the profit that it will bring in. What's more is that with a high interest rate a financial institution is going to minimize the potential losses they would make if your debt turns into bad debt.
Reckless or Profiteering?
The attitude banks and building societies have on unsecured loans varies. Some are very apprehensive about issuing them due to the risks involved. This behaviour from banks and building societies is becoming ever more the case nowadays as a cautious culture has dominated the financial industry since the detrimental economic crashes of the 2000s. On the other hand many financial institutions have a culture which is more encouraging of unsecured loans because of the profits that they can bring in when borrowers with good credit ratings are picked. If a bank only accepts someone as a borrower on the basis that they have a very good credit rating it can make the institution a lot of money.
This is because with the high interest rates set on bad debt unsecured loans the money a borrower pays back to their lender is always significantly more than they actually got off the bank in the first place. There are some institutions nowadays which will even offer to give customers an unsecured personal loan if they have a bad credit rating. This is because it means they can raise their interest rates even higher because the lower the credit rating you have the higher the interest rate you will be given. The institutions issuing out high interest unsecured loans for those with bad credit are ultimately taking a big gamble which could lead to big profits or big losses for the institution.