Unsecured Loans For Homeowners?

It may sound impressive but more and more homeowners when searching for finance resort to unsecured loans. There are many reasons for this behavior but the numbers are amazing: For the last 5 years, the number of homeowners that avoided secured lending and required unsecured financing has increased more than 20% each year.The very competitive loan market has a lot to do with this. Yet, there are many variables that need to be taken into account in order to explain this phenomenon. For starters, requirements for approval are less harsh for homeowners regardless of the loan type chosen and the credit and financial behavior of the average American consumer has worsen in terms of debt to income ratio.Benefits Of HomeownershipWhen a property is used as collateral, it directly guarantees repayment of that loan and in the event of default, the lender can force the owner to sell the property in order to recover the money that he invested. This direct guarantee obviously reduces the risk of the financial transaction for the lender who can in turn offer better loan terms and thus, this makes secured loans very advantageous for both the lender and the borrower.However, even if the property isn’t used as collateral, the mere fact that it exists and is part of the borrower’s assets represents for the lender a guarantee that in the event of default he can still take legal action not against the property but against the borrower and force him to sell any asset or produce the money in another way so as to repay the loan in full.Thus, one way or another, homeownership reduces the risk of any financial transaction whether it is secured or unsecured and so, even if the borrower chooses an unsecured financial product and provided that he is a homeowner, he will be able to obtain better loan terms and lesser requirements for approval than a non-homeowner.Debt To Income RatioThe above, however, doesn’t answer the question as to why do homeowners resort to unsecured loans instead of more advantageous secured loans like home equity loans or lines of credit. Many people think that it is due to the fact that unsecured loans are processed very fast compared to secured loans that require long verification processes for the property’s documentation and the borrower’s credit report.However, though the fast approval timing of unsecured loans is an important factor, another significant detail is what drives homeowner towards unsecured forms of financing: The average American has a high debt to income ratio and knows for sure that in the event of defaulting on a loan and not having the income needed to retake the repayment process he can loose his property very quickly with a secured loan.Instead, in order to obtain a judicial order to sell a property when debt is unsecured, a long legal process is required and that provides the time needed for the borrower to recover from financial difficulties and renegotiate the repayment program so as to avoid loosing the property towards the lender. Since the lender also wants to avoid the costly legal fees of processes associated with unsecured lending, he will most certainly prefer to renegotiate the loan terms.