After the 2008 financial crisis and subsequent recession, traditional lending sources found themselves unable to make the same loans they once had. The supply/demand imbalance created an incredible opportunity for non-traditional debt capital providers.
As private lenders, debt funds and other alternative lending options began to form the “shadow banking” space, new challenges emerged pertaining to risk management. In his Real Estate Finance & Investment article “Observing the Risks of Unsecured Loans,” Investment Associate Will McCabe discusses the private lending arena, how lenders began making unsecured loans and the risks involved.
Unsecured debt is similar to a credit card, in that a borrower can delay repayment obligations for extended periods of time. If disputed and taken to court, the judge could potentially decide that the lender is not owed the principal balance.