Loan decisions are important and can have negative or positive implications depending on the amount of due diligence invested into your loan application. Various loan types exist in the financial market, including secured and unsecured loans, and it’s a challenge to know what may or may not be appropriate in your particular situation. Understanding the differences between these loan options and how they can affect your financial goals is crucial in avoiding repayment struggles. This article delves into secured and unsecured loans underscoring the differences.
What are secured loans?
Secured loans are the most common way to borrow large amounts of money. Mortgages and bridging loans are key examples of secured loans. As the name suggests, the security of these loans rests on the borrower’s assets serving as collateral.
The lender will exercise full rights over the property used as collateral until the loan term expires and the amount plus interest paid in full. The borrower’s assets and their available equity will determine the maximum loan value they can obtain. A secured loan can be secured against any asset, such as bonds, stocks, etc, the most common asset used as security is property.
When should you opt for a secured loan?
Contrary to many people’s perceptions about taking loans, a loan can be a worthwhile means to achieve your goals. In many cases, borrowers, especially entrepreneurs or property developers financing their business through loans, see the risk of losing their collateral in the event of default as worthwhile because the financial reward of their particular deal is significant. Take a bridging loan, for instance. Commercial bridge loans are short-term financial products. These loans are quick fixes for borrowers seeking to finance ongoing commitments while waiting for a liquidity event such as the sale of a property, merger or acquisition, or an increase in revenues.
What are unsecured loans?
Unsecured loans don’t require collateral and thus are riskier to the lender than secured loans. In place of collaterals, unsecured loan providers charge higher interests. Typical examples include credit cards, personal loans, etc. Unsecured loans tend to have monthly repayments, in part so that the lender can see that the borrower is able to manage their debt.
Requirements for unsecured loans
Requirements for various unsecured loan types may differ from one provider. However, financial institutions would need something to bank on if your loan doesn’t come with collateral. Some requirements for unsecured loans you should expect before beginning the process include:
Good capital can be enough leverage for bankers to grant you an unsecured loan. Many financial providers ask for bank statements tied to active savings or investment accounts.
As a borrower, your employment history, credit score, and references can improve your reputation in front of the lenders.
Sometimes, lenders add special terms to unsecured loans exerting more pressure on loan applicants to repay the loan.
Differences between secured and unsecured loans
Some of the key differences between secured and unsecured loan options include:
Good financial history
Having a good financial history is a mainstay in every financial transaction. Business partners will demand credible documents to prove your recent financial history to ensure their business interests. The same concept applies when taking out loans. Secured loan providers are less insisting on this than unsecured loan options.
Banks and bridging lenders require collateral valued above the loan amount for secured loans, while unsecured financial providers require no collateral.
In some cases, collateral is enough when applying for a loan, but unsecured options may insist on a guarantor to guarantee a repayment commitment should the borrower default.
Generally, choosing between secured and unsecured financing options can be difficult. And you may be wrong if you choose a loan option without doing enough due diligence first. This article affords you the basic information to understand both secured and unsecured loans, enabling you to make a better decision.