When you need to borrow money for your business, there are two types of loans – secured and unsecured business loan that you can avail.
If you are all set to avail instant business loan for the needs of your business and can’t decide whether to go for secured or unsecured business loan, this post is for you.
Each loan comes with its share of advantages or disadvantages, and even business loans are no exceptions. As a result, when you make up your mind to avail a loan, it becomes to know the differences between secured and unsecured ones.
Knowing the differences inside out keeps you in a better position to seek one as per your needs, and repayment capacity.
Let’s provide you some insights on secured and unsecured business loan so that you can make a good decision if you have a business loan to apply.
What are secured business loans?
Compared to unsecured business loan, a secured business loan is different as the borrower needs to provide some collateral, guarantor or security. The collateral is utilized by the lender in case if you fail to make repayments on time.
Collateral is something that a borrower can put down as a security for the repayment purpose of the loan for business. You are free to keep your home, investments, car, and other assets that could be liquidated as collateral.
A secured loan for business also has a provision for a lower business loan interest rate compared to the unsecured one. Since you have already provided security while availing the secured business loan, the lender also rewards you with a lower business loan interest rate.
Also, availing a secured business loan is faster to get with speedy approvals all because of the collateral. They are super-easy to get, and the purpose of the loan gets served as they pose a smaller risk for the lender. Why? It’s because you have already provided collateral to assure lenders.
One of the most important things, while you are applying for a secured business loan, is that you should only provide collateral that you can afford to lose. Yes, you never know what may happen tomorrow, and you may not be able to repay the loan.
In such cases, the lender will surely seize the collateral and use it to cover its loss. Thus, it would be better to offer collateral that is of little importance.
It would also be prudent to get the real value of the collateral before availing a loan so that you are aware of its value and not get cheated later.
Be informed to understand that lenders always give lower values to collateral because they need to liquidate it quickly. To do so, they sell the security at a lower price. Thus, when you have recently analyzed the real worth of your collateral, you can also convince the lender that it contains a value.
What are unsecured business loans?
An unsecured business loan is a facility where you don’t need to put in collateral while availing the loan. You get such a loan after proving your eligibility with the help of your credit score, repayment history and other factors.
As a result, the rate of interest for such a loan is always higher compared to a secured business loan type. Why? It’s because since there is no collateral involved as compared to a secured loan, the rate of risk for such loans is higher. Hence, lenders charge a higher rate to compensate for a loss.
Sometimes, the interest rate on an unsecured business loan could be even higher than that of a credit card. The only respite for borrowers is that the interest-rate is fixed and you can pay a fixed EMI leading to easy repayment.
Also, the tenor for an unsecured business loan is shorter than secured ones as the lenders want their money to be back soon as it lessens their risks. It is one of the reasons more secured business loans are approved than unsecured business loans.
The Bottom Line
Since you are aware of the features, advantages, and disadvantages of secured and unsecured business loans, you would be able to apply for one as per your needs.