Unsecured credit cards are a type of loan offered by several banks in American and Europe, where the debtor does not necessarily have to provide with material collateral or any other form of security. The only form of agreement is a declaration by the debtor to repay the amount in a given period of time. This method of acquiring loans has become very common in the United States of America, as people try to get quick loans with fewer requirements. In addition, people perceive it as a quick way of getting things done. However, the loans are offered at a very high interest than any other form of loan, mainly because this loan is highly risky to the bank. People end up paying hefty amounts of money due to the high interest charged. It is thus a common thing to find people with large amounts to pay, and sometimes takes several years to complete. In this regard, it is arguable that unsecured loans or credit cards are not good for the economy. USA should therefore abolish unsecured credit system because it is of high risky, expensive and the downfall of the American economy.
The roots unsecured credit card system can be traced back to the late 19th century, when several financial institutions in the Great Britain offered the people some loans under written promises to be paid back, even without collateral. This was a deviation from the previous forms of loans, when the institutions could not provide any loan to anybody without collateral and several referees. The system gained popularity because the banks gained a lot in terms of customers and the amount charged as interest, while the customers gained a quick access to loans for capital. As this was the time of industrial revolution in the United Kingdom, it was a success, despite several cases of people having huge amounts to repay to the banks. In addition, the system allowed many people to invest in various fields, as the access to loans became possible. At this time, people turned to large investment, thus the system spread from the United Kingdom when several American banks adopted the system, and secured the rights to offer such services. Ever since, the system has evolved from this early form to include several brands such as the unsecured credit cards which is common in America today.
The unsecured credit cards system is highly risky to both the lender and the debtor. Considering that there is no provision for collateral, even under the law, there are high risks that the bank will lose incase the lender disappears in any way. Despite the fact that banks find this system important for their profitability due to the excessive high interest they charge, they are at the risk of losing the mounts of money they lend out to the people incase of fatalities and illegal migration from America. The banks cannot offer larger amounts of money in terms of loans because of the risks involved, and thus this implies that the people have little chances of obtaining capital for setting up the business through unsecured loans. This also means that the people cannot invest using this finances funded through unsecured loans, considering the high amounts of money required to set up a firms, however small, in the united states of America. On the part of the bank, there is little capacity for expansion as far as the unsecured credit is involved due to the fact that the amounts offered in such services are very low, and thus the interest is also low. The banks just have to look at the applicant’s history of investment and savings as one of the few criteria for determine the ability of paying back the loan. This further implies that the system is biased. The applicant may have a short history of investment, but a high potential of investment, thus the bank, on denying such a person some loan, will lose on interests. The opposite is normally true, where the bank judges the applicant on the basis of past history of payment and investment, but fails to consider other factors which may make the person fail to pay the debt, and thus they are at the risk of losing the entire amount.
As seen, the unsecured credit is expensive and highly risky and the best thing would be to abolish it in order to reduce the risk of the downfall of the American economy. Instead, it should be proposed on establishing secured credit which has less risk involved. Secured loan is of utmost importance and will not only affect the banks for the availability of the collateral but also the clients who will be now have an opportunity of having more credit. It is possible to solve this issue by providing a legal system that wills allow the banks to provide soft loans under very low value of collateral. People could be provided with loans under their potential of payment, while their employment would be used as the criterion for securing the loans. Banks should consider that people are capable of paying the loans if their annual salaries are considered as the form of security.
This form of solution described above is not the best and banks in other parts of the world have tried this. However the benefits are much superior to the unsecured loan. It seems thus, that there is no problem in America if this is the solution, mainly because in cases where people’s employment is the collateral, other factors such and employee turn over, layoffs and other are not considered. Although this may seem quite impractical because the secured loans will only be offered depending on a person’s occupation, thus denying low earners some opportunity to invest; this is not the case. Low earners will also be granted their opportunity to the amounts they are capable of according to their earnings. Moreover, this employee based form of loan will work well; the bank s will not lose on the interest charged since they will have to charge on loan depending on the level of employment, in accordance with the laws. Although this is a limitation and a problem as it therefore means that they will no longer be at a position to determine their own rates of interest; they will be able to work hard in order to increase their profitability than what they would have gained on unsecured loans and therefore overcome the problem.
