To finance their business ideas, entrepreneurs always search for Icapital secured business loans option to meet the expenses of their working capital. While selecting their business loans, every business owner stumbles upon this question, whether they should opt for secured or unsecured loans. These are two basic types of bank loans that every business owner should be familiar with.
Regardless of your lender, it is important to understand the difference between secured vs unsecured loans. The difference between these two types will directly influence the terms of the loans and will affect the risk you hold as a borrower. Therefore it becomes crucial to take time to understand the basic difference between these to determine the best loan option for you.
What is a Secured Loan?
Secured loans are defined as loans that are backed up with some kind of collateral. Collateral refers to an asset accepted by lending institutions as security for the loan repayment. In any case, if you are unable to repay your loan, you will lose the collateral. This makes secured loans structurally riskier because you have physically had something to lose.
Assets like machinery, vehicles, real estate, and even stocks and shares can be pledged to avail a loan. In an event where you fail to repay the loan. the finance company may repossess the assets and resell them. After that, it will deduct that amount from your loan and then you will receive a legal recourse as a reminder of what you owe to the company.
As a business, if you are looking for a substantial amount of money then secured loans are the main source of financing for you.
Examples of Secured Loans
Mortgage: Loans for a property are secured with the property itself
Auto Loans: While making a major vehicle purchase, these loans are secured with the vehicle.
Construction loans: Loans that you take out to construct on the land of your own. These are also secured with the property.
Home equity line of credit: Another type of loan that you can secure with your property.
Pros and Cons of Secured Loans
Secured loans offer the following benefits:
- Longer repayment terms
- Higher borrowing limits
- Lower interest rates
Drawbacks of secured loans:
- The need for collateral to avail of the loan
- The risk of losing the collateral in case you are unable to repay the loan.
- A longer repayment term can also be considered a con depending on your point of view. It also means that you will be in debt longer.
Unsecured Loans are less risky as it doesn’t require you to have collateral. An unsecured loan is a loan that is given to you based on your creditworthiness.
Different financial institutions offer unsecured loans for education loans, personal loans. some property improvement loans, credit card purchases, etc. These are often called signature loans. Generally, unsecured loans are hard to get approved and you need to have a strong credit history along with a reliable stream of income to avail. If you have a bad credit history then it may be extremely difficult for you to find unsecured loans to finance your business.
Examples of Uncensored Loans
Student Loans: These loans don’t apply to funding your small business but they are a great example for understanding unsecured loans. In a student loan, you do not have to provide any collateral. However, you may risk things like wages in the future or garnished tax refunds.
Signature Loans: Signature loans can be availed by people who have a good relationship with their bank. It simply relies on a good faith assessment and the borrower’s promise to repay the funds.
Credit Card: Credit cards are the most common example of an unsecured loan instrument. Whenever you purchase something with a credit card, the financial institution of the card is giving you an unsecured loan on the spot. In this case, your creditworthiness is already determined by the bank, and you are given a credit limit based on that.
Pros and Cons of Unsecured Loans
Unsecured loans offer the following perks:
- No need for collateral
- Zero risk of losing something since you are not giving anything
- Easier to borrow small amounts
Drawbacks of unsecured loans:
- Shorter repayment terms
- Higher interest rates
- Personal liability
- Smaller borrowing amounts