Loans can be a lifesaver when you’re hit with major personal or business expenses. However, if you take the wrong deal, it can quickly turn into your worst financial nightmare. That’s why choosing the type of loan best suits your financial situation is important. Unfortunately, this is easier said than done.
With the plethora of loan options available, it’s easy to get confused, overwhelmed, and pressured into choosing “whatever sounds good.” To help you make a more informed decision and ensure that you enjoy a smoother loan application journey, we’ll shed some light on two main loan categories—secured and unsecured—in this article. Read on to learn the difference between them and how to decide which is right for you.
What Is A Secured Loan?
A secured loan is a type of loan that is supported by collateral. Before this loan is approved, the lending facility would require you to pledge liquid or physical assets such as a car, real estate, collectibles and antiques, fixed deposits, bonds, or insurance policies as collateral. The asset’s value would then be verified, and if deemed satisfactory, a lien would be placed on it as a security measure. This means that if you cannot pay back the loan, the lender has the right to seize and sell your collateral to cover the cost of the loan. It’s important to note that the value of the collateral must be equivalent to or even higher than the loan amount to reduce the lender’s risk. As a result, you’ll be offered a much lower interest rate for the loan.
Some common types of secured loans include:
- Car Loans: Here, the car you’re looking to purchase will be pledged as collateral to secure the loan. Once you’ve completed the repayments, you’ll regain full car ownership.
- Equipment Loans: In this case, the equipment or machinery you need to buy for your business will be used as security for the loan.
- Mortgage Loans: The same principle also applies here. If you default on the loan repayment, the lender can take possession of the mortgaged property and force a sale.
What’s The Difference Between A Secured And Unsecured Loan?
The key difference between a secured and an unsecured loan is whether they require collateral backing. Unlike secured loans, unsecured loans are not protected by valuable assets. Instead, they are sanctioned based on your financial status and creditworthiness. In other words, secured loans are asset-based, while unsecured loans are cash-flow-based. Some examples of unsecured loans are student loans, credit cards, and medical debt.
Other differences between secured and unsecured loans include:
- Chances of approval: Secured loans have higher odds of approval than unsecured loans because they are less risky for lenders. Since collateral is involved, lenders are more likely to approve your loan application. For unsecured loans, you’d need to have a great credit history to be considered, especially if you’re applying for a huge sum.
- Interest rate: Higher interest rates are levied on unsecured loans to compensate for the risk the lender is exposed to, whereas secured loans have lower interest rates because the borrower bears most of the risk.
- Borrowing limit: Secured loans generally have higher borrowing limits than unsecured loans. As long as the value of your collateral is sufficient to cover the loan amount if you default, you can borrow as much as you want. For unsecured loans, banks set borrowing limits based on your credit rating and their maximum unsecured loan limit.
- Processing time: Unsecured loans are usually processed faster than secured loans as less documentation is involved. With a good credit score and credit history, you can have your loan approved within a few days or even hours. On the other hand, secured loans take more time to process because lenders have to conduct legal and financial due diligence and asset evaluation and may even require more documents, depending on the loan amount and type of collateral.
- Repayment period: As we’ve already established, banks take on less risk with secured loans than with unsecured ones. As a result, they tend to offer longer repayment periods for secured loans.
Which Lending Option Is Right For Me?
Secured and unsecured loans can be advantageous in different situations. Before deciding which loan is right for you, you need to define your personal or business goals and consider factors such as your source of income, assets, repayment capability, term, and urgency.
A secured loan may be a good option for you if you’re trying to borrow a large sum of money, especially if you don’t have the best credit history but have high-value assets that you can pledge as collateral. These assets can be yours or a shareholder’s. But remember, the collateral value should at least match the value of the loan amount. You can also choose this type of loan if you have long-term plans and would like to enjoy lower interest rates and an extended repayment period.
An unsecured loan might be more beneficial to you if you require urgent financial support but lack sufficient collateral. It’s also a better option if your business needs a short-term injection of capital to expand or stay afloat in a downturn, especially if it’s a seasonal business. As long as you have a steady source of income and a good credit score, your loan should be approved and issued typically within a few days.
How Do I Receive A Loan For My Business?
With Simply Finance, applying for a business loan has never been easier. You can get a fast quote by taking a preliminary assessment, where you would be required to define:
- the type of loan you want,
- the purpose of the loan,
- the loan term,
- your financial status and relevant personal situation, and
- your ability to repay
After you’ve submitted this information, we’ll begin the verification process, which may include asking you for more financial evidence and asset statements. Once the information has been verified, you’ll be contacted and given a contract to review and sign. The funds will then be credited to your account.
Get In Touch For A Quote Today!
At Simply Finance, we pride ourselves on providing personalised services to our clients. Our financial consultants are always on standby to help you find the best loan option for your personal and business needs. Don’t hesitate to contact us for a quote or expert advice!