NEW YORK – If you are thinking about getting an unsecured business loan, knowing what it actually means is very important. What does it imply and how is it different from secured business loans? We are going to cover these aspects in the following piece so that you know exactly what you’re getting into if you apply for a small business unsecured loan.
So what’s an unsecured loan?
An unsecured loan is a type of loan where a lump sum is given to you and you are expected to repay it in the time agreed upon with the lender. In most cases, this means that you will have smaller monthly payments which you will need to make before each month’s deadline until you pay up the full amount that you have borrowed. If it sounds pretty straightforward, that’s because it is.
Secured business loans
A secured loan is the version of the same deal which includes collateral. Collateral is one form or another of assets that will end up in the lender’s hands if you can’t pay up in time. If you can’t pay up what you owe in an unsecured loan context, the lender will look for other ways to recover their investment. However, in the secured loan context, the lender will seize the assets listed as collateral. These items have to be of high value so normally you would use your car, house or something like that as collateral. And if you can’t make the payments on time, the lender takes said car or house.
Better for first-time borrowers?
Some believe that getting a secured business loan as a first-time borrower is a better psychological option because the added pressure of potentially losing your house will drive you to always make your payments on time. While there is certainly logic in that way of thinking, it’s also very risky. If you qualify for an unsecured loan, you might as well take it and find motivation of repaying in time in common sense.
Bigger interest rates
When you take out a secured loan, the bank or whatever lender you’re using won’t be too stressed out about you paying back, because worst case scenario, they just take your house or whatever collateral you put down, which sometimes can be more than what you owed. In unsecured loan scenarios, however, they will be constantly worried about you not being able to pay back, and therefore the interests are far bigger here.
The illusion of safety
You might think that getting an unsecured loan will protect you against repos. However, it’s a common misconception that unsecured loans can’t lead to having things repositioned. With a secured loan, the lender can only seize the assets put down as collateral whereas, with an unsecured loan, they have a much wider range of assets they can pursue in search for compensation.