Secured vs. Unsecured Loans: Understanding the Difference

Posted by Ariana Smith on December 13th, 2016

There are a lot of factors to consider when applying for business loans. Savvy borrowers should get to know the difference between different loan types to have a better understanding of their funding options. Two of the most common types of business loans are secured and unsecured loans. Below, we will discuss what each one is and what you need to know about their important differences in order to make the right decision for your company.

What is a Secured Loan?

When you opt for a secured loan, you have to pledge some type of asset as collateral, such as a car, home, or other piece of personal property. The debt (or money borrowed) is then secured against the collateral. This means that if the borrower does not pay back the debt, the creditor (or lender) is able to legally take possession of the asset, which they may sell in an effort to regain some of the original loan amount.

What is an Unsecured Loan?

While secured loans are secured against collateral, unsecured loans are not connected to a personal asset. This means that the lender cannot take possession of the borrower’s personal property if the debt is not repaid. These types of loans often have a fixed interest rate and borrowing term, which means that borrowers have a set amount of time to repay the loan and the interest rate cannot be changed during the original loan term.

Understanding Secured vs. Unsecured Loan

Now that you know the difference between a secured and unsecured loan, you may be wondering, which loan type is right for me or my business? There is no quick answer to this question. The key to choosing the best loan option for you or your business is understanding the advantages of both the secured and unsecured loan and deciding which option might provide the features you want or need.
Secured loans provide some advantages for individuals and business owners who need personal funds or to raise capital for their business including:

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• Higher Borrowing Limits – Since these types of loans are secured against collateral, they usually provide higher borrowing limits than some unsecured loans. This may be a good option for individuals who need to borrow a larger amount of money.

• Longer Payback Period – Many secured loans also offer a longer payback period when compared with unsecured loans. For instance, mortgages are one of the most common types of loans and can sometimes offer a payback period of 30 years or more.

• Lower Interest Rates – Some secured loans also have lower interest rates than unsecured loans because the lender has collateral, reducing the risk should the borrower fail to pay back the loan.

On the other hand, unsecured loans also offer individuals and business owners clear benefits that can be advantageous to individuals seeking personal funds or business owners who want to raise capital for their business:

• Fixed Term and Interest Rate – With a fixed loan term, the borrower has a clear understanding from the start how long they have to pay back the loan. A fixed interest rate can also be beneficial as it allows individuals and business owners to know from the start what they will pay in interest with no surprise rate increases in the future.

• Quicker Approval Process – While secured loans require a great amount of paperwork, unsecured loans require less due to the lack of collateral. This means that unsecured loans often have a quicker approval process, allowing individuals and business owners to put their loan funds to work sooner rather than later.

• No Need for Collateral – Since unsecured loans do not require the borrower to put forth any personal assets, there is no need for individuals or business owners to find collateral. Some borrowers find peace of mind in knowing that their personal assets are not on the line when it comes to their loans.

Before You Borrow: What You Need to Know

In the end, there is no one size fits all solution for getting the funds you need to start, run, and grow your business. If you need to raise capital, it is important to learn more about unsecured small business loans and other lending options to determine which funding opportunities are right for you and your company. Take a look at all of your options before you start the loan application process.
Before filling out any application materials, get to know what your options are and weigh the pros and cons of each loan type. Both secured and unsecured loan options can vary greatly between lenders, so it is vital that the borrower gains a better understanding of how these loan options work, what the lender is offering, and what the borrower must give in return before finalizing any loan paperwork.