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Secured vs. unsecured loans: What’s the right option for you?

loan applicationLooking to get a loan? The first thing to decide is what you are looking for.

Business Loans vs. Personal Loans

Unlike business loans, personal loans focus on the individual. So the loan is provided to the individual and not the company. When that happens, the subject of potential shifts towards the individual. Your personal finances and credit card history are evaluated, and then the amount of the loan to be approved is decided. All of this happens without providing collateral.

If you’re in the phase of starting your business, self-funding is the least risky measure that can be taken, and this will come through personal financing. You can look at options like to help you out.

When exactly does the financing need to be sorted out?

In plain physics, when the rod has just been taken out of a flaming oven, you strike it with a hammer. The same concept is applied to financing your business. As lucrative as personal loans may sound, there’s a definite timeline which will help you reap more out of the investment. Before we talk about secured and unsecured loans let’s understand this better.

  • Just Starting Off

Being a newbie in the market, a lot of aspects need to fall into place before you make a name for yourself. Taking a business loan at this point in time would not be a good idea as the loan would not consider the social standing of the business.

  • The Amount Needed isn’t Very Large

When opting for personal loans, always keep the amount as low as possible. A lot of banks lend out small loans so that the customer can save up on closing costs as well.  In the future, when you pay off the loan, it won’t come as a huge burden to you and if the business does well because of the minor investment, serious large investments can be made later.

  • Escaping Collateral Damage

Many times, even after steady cash flow, banks won’t give a business loan due to insufficient collateral. This can be a huge hindrance when you’re a business. It’s not the same with personal loans as banks don’t ask for collateral. As long as you have a good credit history, you’re good.

  • Sufficient Time Limit and Interest

In business loans, banks charge monthly interest rates. They might go as low as 5%, with a constrained paying period. On the other hand, personal loans can go as low as 3.7% and provide a sufficient pay-off period extending up to seven years.

Secured Loans vs. Unsecured Loans

An intelligent borrower is someone who understands everything about the loan and then selects                  the best option available. Keeping that in mind, there are basically two types of loans. Both of them have their own advantages and disadvantages. But knowing about both of them is essential. Here is a short description which will help you know which loan option is best for you.

Secured Loans

A secured loan is a loan which a financial institution lends to the borrower when the borrower can offer something as security, known as collateral. Collateral is security in the form of an asset or property and in return the institution lends money to the borrower.

Until the borrower pays the loan, the financial institution keeps the collateral as security. If the borrower is unable to repay the loan or becomes insolvent, then the ownership of collateral passes from the borrower to the institution.

Unsecured Loans

Unsecured loans, as the name implies, does not secure collateral in the form of asset or property or even gold. Unsecured loans are offered without security. Hence, an added disadvantage with this type of loan is that it is very risky.

The lender takes a very high risk in lending money to the borrower. Therefore, the interest rate which is charged on unsecured loans is quite high in comparison to secured loans. Unsecured loans are difficult to acquire. The lender first observes the entire financial position of the borrower. If he finds potential, then he evaluates and assesses whether the borrower will be able to repay the loan or not.

What is Best for You?

So, which one is best for you: a secured loan or an unsecured loan? This is definitely confusing, and one cannot decide until they understand both types of loans. It is necessary that the borrower must understand the real benefits and consequences of both types of loans and then make a decision based on this understanding.

If the financial position of the borrower is good enough, then selecting unsecured loans is the optimal option. However, keeping the fact in mind that repaying the loan is not going to be easy, then the borrower must opt for secured loans by giving his property as collateral.