A loan is a word that causes a lot of fear, due to the risks associated with taking one out especially in hard times. This is where unsecured business funding and secured loans help make the process a lot less scary for businesses.
The distinctions between are in how much the business intends to loan out and how much interest they will have to pay moving forward.
Defining a Secured Loan
First things first, what is a “secured loan?” A secured loan is considered to be the most secure option for the lender as it has a built-in collateral clause as security.
It entails the business taking out the loan has to submit something in the form of collateral that can be repossessed by the business if the borrower ever defaults and the debt becomes irrecoverable.
Defining features of secured loans
- Qualifying for a secure loan can seem to be more cumbersome than a regular loan. Since the condition of the collateral is not always certain, the lender will want to have as much information about the business or a person’s credit and trade history before committing to a secured loan.
- The amount borrowed can be relatively higher, since collateral for the secured loan is most likely an item of immense value. For example, a car or a home can be put as collateral. Therefore, a secured loan can be for a larger sum of money.
- Much more lenient repayment clauses. The schedule for the repayment timeline for secured loans tends to be longer.
Advantages of secured loans
Lower rates of interest
– The extended period of repayments
– By making consistent, timely payments towards secured loans, your credit score will improve.
Disadvantages of secured loans
– If you cannot make the payments on time, you will lose the collateral (be it your house or your vehicle)
– Your credit score could take some damage if you fail to pay on time.
The housing and automobile market is supported by the existence of secured loans. Without the option of home mortgages, a limited amount of people in the United States would be able to afford houses at real estate prices.
Additionally, they wouldn’t be able to cash in on new car prices as they would rebuff the automobile industry due to the fact that average American citizen does not hold huge reserves of liquid cash at hand or in the bank at all times.
Secured loans are an attractive option due to their ability to make large scale items affordable. The loans are also desirable for lenders, due to the scale of the collateral placed in case the borrower defaults on the loan.
The risk on the loans is low for the lender, and it helps keep the interest rate lower which is good for the borrower.
Lenders are always interested in knowing the value of your collateral especially if it’s a real estate. It helps them gauge how confident the borrower is in repaying a massive loan for the next 15-30 years and they need to be sure that if you are unable to do so they can possess your house and sell it to cover that debt.
Defining an Unsecured Loan
On the other side of the coin is unsecured loans. These are fairly much more common than secured loans. This is due to the fact that unsecured loans do not require collateral, however, it means that the lender is engaging in a very high-risk deal.
The lender is taking the borrower for his word that the debt will be repaid timely. But in this case, if the borrower defaults, there is a very low chance that the debt is ever recovered.
Forms of unsecured loans
– Credit Cards
– Personal loans
As seen with credit cards, you have the ability to purchase things as long as the bill that is issued by the card company is repaid. High interest starts to creep into the bill if the full balance is not repaid timely. It becomes a lot more difficult to pay back for the borrower.
Defining Features of Unsecured Loans
– The size of the amount on the loan is considerably smaller. With the exception of student loans, the amount taken out on an unsecured loan is smaller but the amount of interest charged is much higher. Due to the increased risk for the lender.
– The average credit card rate can range from 15-20%, and payday loans can cost upwards of 300-400%. The interest rates are much higher.
Advantages to Unsecured Loans
– These types of loans are far more convenient, and easier to qualify for. They are much more useful in the way that they can help you purchase items and make payments in situations where the money is short.
– Timely monthly payments of unsecured loans can help you improve your credit score.
Disadvantages to Unsecured Loans
– The increased rate of interest will lead to you paying comparatively higher on goods and services, that you would otherwise need to spend.
– Unpaid loans will harm your credit score.
Since unsecured loans do not have the option of collateral for the lender, this is a massive drawback.
The inability to possess an item to recover the debt in case the borrower defaults make the lender much more vulnerable.
After this in-depth look at and discussion of unsecured and secured loans, let’s look over the five key differences between them.
1) Secured loans require a collateral to be placed in exchange for a loan, whereas an unsecured loan carries no collateral with it.
2) The reason secured loans have larger amounts in terms of loans is due to the fact that there is collateral in exchange in case of a default. Unsecured loans are of considerably lower or smaller amounts.
3) It is easier to qualify for an unsecured loan as compared to a secured loan. It is useful for payments that need to be made immediately.
4) Secured loans have lower rates of interest as compared to unsecured loans, due to the presence of collateral in the deal.
5) Being unable to pay on a secured loan equals a possession of the collateral you placed. Unable to pay on an unsecured loan isn’t as damaging to the borrower as it is to the lender, because recovering the debt is incredibly hard.