Have you decided to apply for small business loans in order to get funding for your new business venture? Are you having a hard time deciding whether to obtain a secured or an unsecured loan? Worry no more!! You have landed at the right place!! It is time for you to get aware of these terminologies and probably get familiar with the underlying concepts. Let us dig deeper to have an in-depth understanding.
What is a secured loan?
As the name suggests, secured loans are offered to the borrowers by taking collateral or other valuable assets as a security. These valuable assets might be anything like a house, land, car, or even stock or a bond. When these assets are used as collateral, the lender keeps ownership rights in the asset until the loan gets repaid. This directly implies that if the borrower fails to repay the loan amount or meet the terms of the agreement, the lender can legally seize the asset and claim its right on it. The lenders are then eligible to sell the collateral to recover the loan amount.
For example, if you have taken a secured home loan and stopped making the monthly payments, your lender will foreclose on the home and sell it to pay off the mortgage. Furthermore, if the borrower plans to sell the home, they are expected to pay off their remaining mortgage immediately.
What are the pros of secured personal loans?
- Since the borrowers are offering collateral to secure the loan amount, they can get larger loans.
- Borrowers can get loan amounts at lower interest rates as the lenders are confident enough of the borrower’s creditworthiness. In addition, as there is less risk involved with offering the loan amount, secured loans come with lower rates of interest.
- In addition, borrowers who are wondering how to get a personal loan with bad credit can easily apply for secured personal loans and get the funding.
What are the cons of secured personal loans?
- In case the borrower defaults on the loan amount, the asset named as collateral on loan is at risk. The lenders can seize the property and sell it to recover the loan amount.
- Secured personal loans sometimes restrict borrowers to purchase a specific asset or putting the money in limited options.
What are unsecured loans?
If you have read through and reached this far, you must have understood what unsecured loans signify. The unsecured personal loan does not require any collateral to secure the loan amount. These types of personal loans are issued on the basis of the creditworthiness of the borrower or their ability to repay the loan. However, the lenders demand proof of income savings, employment, or credit history to ensure that you will be able to repay the loan amount on time. Common unsecured loans include credit cards, student loans, and personal loans.
What are the pros of unsecured personal loans?
- You can be eligible to get the loan amount even if you do not own a property for collateral.
- The loan is disbursed quickly without much hassle.
What are the cons of unsecured personal loans?
- The interest rates of unsecured personal loans are usually higher than secured ones because the lender has a higher risk level of the loan not being repaid.
- You must have a decent or excellent credit history to be eligible for the loan amount.
Explore the suitable small business funding options to make the right financial decision!
