Trying to decide which type of loan is best for your business can be like stepping into a maze: the array of options can be overwhelming.
That’s why understanding the difference between a secured and unsecured loan can help hugely when it comes to choosing the right loan for your needs.
In this blog, we’ll explore the difference between the two types of loans, as well as other crucial factors you need to consider before obtaining a loan.
Why knowing matters
Before you start filling out forms, it’s important to understand the distinction between secured and unsecured loans. Your financial journey needs a direction and knowing these differences will set you on a path that is tailored to your business goals and comfort with risk.
What are secured loans?
Secured loans are backed by collateral, which could be an asset like a property, land, or possessions. This collateral serves as a security measure for the lender in case your business defaults on the loan.
Because of this safety cushion, secured loans generally offer lower interest rates and higher borrowing limits compared to unsecured loans. However, defaulting on payments might mean losing that pledged asset.
What are unsecured loans?
Unsecured loans, on the other hand, do not require collateral. These loans are granted based on the strength and creditworthiness of the business. As there is no collateral involved, making the stakes higher for the lender, interest rates tend to be higher, and the borrowing limits may be lower compared to secured loans.
How does credit history impact loan type?
Your business credit score is what determines the type of loan you can obtain. Think of it like your financial resume. A strong credit history often opens doors to more favourable terms for unsecured loans.
However, a less favourable credit history it might lead to higher rates or difficulties in being approved for an unsecured loan.
Secured loans might be a more feasible option, as the collateral offers security to the lender.
What factors should you consider when obtaining a loan?
If you’re contemplating taking out a loan, here are the various factors that you might want to consider:
Interest rates
Compare interest rates for both secured and unsecured loans. While secured loans generally offer lower rates, assess the total cost over the loan duration.
Collateral
Assess the assets you are willing to pledge for a secured loan and understand the risk of losing them in case of default
Creditworthiness
Evaluate your business credit score and financial standing to determine eligibility for unsecured loans and their associated terms.
Repayment terms
Make sure you are aware of and understand the repayment period, monthly instalments, and penalties for late payments.
Borrowing limit
Consider the amount you need and whether it aligns with the borrowing limits of the loan type.
Find the right loan for you with Bespoke Commercial Finance
Choosing between a secured and unsecured loan is not just about obtaining funds; it’s about securing your financial future. Assessing your situation, risk tolerance, and financial goals will help guide you to the best loan fit.
At Bespoke Commercial Finance, we’re here to help you make the best choice for your business. With our extensive network of lenders, we can find the solution that’s right for you. To find out more about our services, don’t hesitate to get in touch with our team today.
