Finance Explained: Secured VS Unsecured Loans
If you are a regular in the world of finance, then it's probable that you would be familiar with the terms ‘secured loan’ and ‘unsecured loan’. However, if you are new to finance, it is important to know that loans come in one of two forms…
To put it simply, secured and unsecured loans are a way of deciphering if the loan you have acquired is secured against an asset or not.
Within the realm of asset-based lending, secured loans are the preferred method as they provide a form of financial security to the lending institution. Simply put, the loan itself is connected to a piece of collateral - an asset, this may be plant machinery, agricultural equipment or a vehicle (just to name a few). Subsequently, if you cannot keep up with repayments, lenders are within their rights to take back possession of the asset.
Whereas, unsecured loans are not protected by any collateral. Lenders deem this riskier because, should you default on the loan, they are not protected by any collateral security. Due to this, each lender has their own restrictions on unsecured lending including; the amount that can be borrowed and specific criterions that have to be met. Popular types of unsecured loans include credit cards and merchant cash advances.
As you can imagine secured and unsecured lending yield a variety of advantages and disadvantages.
What are the advantages of a secured loan?
- Secured loans are generally available for larger sums, meaning that secured loans are preferable if you wish to invest in high value items.
- As the loan is secured by the asset, if you have a less-than-perfect credit rating, you are more likely to be approved for a secured loan rather than an unsecured loan.
- An additional benefit of a secured loan is that the repayment periods are often longer making your monthly repayments easy to manage.
- Lower interest rates are often attributed with secured loans as it is less of a risk to the lender.
What are the disadvantages of a secured loan?
- It is important to check the terms and conditions of the agreement as sometimes you could be subjected to early repayment penalties-which could increase the overall cost of borrowing.
- You are at risk of losing the use and ownership of an asset if you do not keep up with the monthly repayments.
- It is necessary to have assets in your business, which can be challenging for new companies.
- Due diligence processes could mean that it takes more time to acquire funds.
What are the advantages of an unsecured loan?
- If approved, it makes it possible to borrow an amount of money as no collateral is needed. Due to this, assets that you own are subsequently not put at risk if you default on payment.
- The process itself can be a lot quicker in comparison to a secured loan because there is no collateral to evaluate.
- You do not need to have physical assets in your business.
What are the disadvantages of an unsecured loan?
- If you have a poor credit rating or wish to rebuild credit, an unsecured loan is unlikely to be the answer for you. This is due to the lenders underwriting criteria that looks for applicants who can demonstrate repayment history, in a position of strong cashflow and meets the affordability checks.
- An unsecured loan is riskier and thus incurs larger interest rates- so smaller amounts can still prove expensive.
You may feel that a secured loan may benefit your more than an unsecured loan or vice versa. It is all relative and there is no right or wrong answer to finance. If you have any further questions about secured or unsecured loans and what will suit your circumstances please do not hesitate to contact us via firstname.lastname@example.org or in the office on 01603 733500.
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