At least two types of bank loans that every business owner must be familiar with prior to signing the dotted line are unsecured business loans and secured loans.
Regardless of the type of lending institution you are working with, it is crucial to know the difference between secured and unsecured loans. Overall, this difference will cause an impact on you as a borrower and often directly affect the terms of the loans themselves. Thus, it would help if you took the time to learn the structure of the various loans so it will be much effortless to determine the best option for you.
What is a secured loan?
Secured loans require some form of collateral. Collateral is something that is pledged as a security for the loan’s repayment. In case you are unable to repay your loan, you risk losing the collateral.
What is an unsecured loan?
In some cases, you might not have ready collateral to offer, or you might be looking for a no collateral loan that is less risky. Unsecured business loans are issued by the lender and are only supported by the borrower’s creditworthiness rather than collateral.
Banks and financial lenders also provide unsecured loans, which are generally given for credit card purposes, personal loans, or some type of property improvement loan. These are often termed signature loans. It is hard to get approval for these types of loans unless you have a solid credit history and a steady stream of income. Finding unsecured loans for a bad credit score can be extremely challenging, but it is not unheard of. If you want to explore no collateral loans, make sure you understand what you are getting into.
Since the lender will rely on your agreement, the loan terms will reflect this risk. High-interest rates are something to be expected. Additionally, the lender may require you to pay the money back in a timely fashion and might be less inclined to provide you large amounts since they do not have anything to seize if you fail with repayments. In this agreement, your word is your collateral. Although your word may mean a lot, it is not an asset a lender can seize and sell.
Examples of unsecured loans
- Credit card loans
Credit card loans are the best example of unsecured loans. Every time you pay for goods and services with a credit card, the institution offers you an unsecured loan. They had previously determined your creditworthiness and provided you with a credit limit when you requested credit card approval.
- Signature loans
You may be able to get a signature loan if you have a good relationship with your bank. It is also a type of unsecured loan. It relies on good faith and the borrower’s character as well as their ability to repay the funds.
- Student loans
Although student loans are not connected to funding a business, they are an example of unsecured loans. Although students don’t have to provide any physical assets to get a student loan, they do risk something such as future wages if they are unable to make repayments.
Secured loans versus unsecured loans: which should you choose?
The type of loan you choose will be contingent on the services you are in and what your goals are. Factor in your credit history. Lenders will necessarily want some kind of assurance that you are not simply gambling with their money.
