What Is An Unsecured Business Loan?
An Unsecured Business Loan is a type of loan that doesn’t require the merchant who is borrowing the money to put any collateral on the line for the loan. This allows borrows to get the money they need without putting any valuable assets or property in harm’s way. In exchange the lenders providing the loan mark up their interest rates significantly.
What’s The Difference? Unsecured Loan Vs. Secured Loan:
When we try to apply for a loan, we tend to not think about what our options are, instead try to go for whatever we get approved for. But you as borrower have two primary options. Unsecured loan vs a secured loan. What is the main difference? Here’s is everything you need to know about choosing between a secured loan vs. unsecured loan.
A considered secured loan is a type of loan that is associated to a portion of a collateral – something valued like your assets, property, home or maybe even your car. With this type of loan, the lender that’s issuing the loan can take ownership of the agreed collateral you put on the line if you will not repay the amount loan you got. A mortgage or a loan for a car is the most common types of such loan. For example, the average 30-year fixed mortgage rate is 4.54%.
An unsecured loan is not backed up by any kind of collateral. If a merchant will have a failure to pay to the loan, the lender can’t instantly take his possessions. The most seen natures of such unsecured loans are credit cards, business loans, personal loans, and student loans. Example – An average payback on a business loan is usually in the range of approximately 30-50%.
Secured Loan Vs. Unsecured Loan: Which Is Right For You?
Both types of loans have their perks but what is right for you really depends on your situation. The secured type of loan is easier to have than an unsecured business loan. The problem is with a secured loan you will be limited to the amount of money you will get but on the bright side, your interest rate will be much lower. Whereas, an unsecured loan gives you much higher credit limits. The only problem is, it comes with a hefty interest rate.
So, your needs and the situation you are in dictates what is right for you.
Is An Unsecured Loan Really “Unsecured”?
Despite popular belief and what you might know, in most cases, unsecured business loans aren’t really unsecured. Yes, don’t get me wrong there are many lenders out there that do offer completely unsecured loans which are known as signature loans. These loans don’t require any collateral or any sort of personal guarantees, but these lenders charge outrageous interest rates in exchange for them not taking any collateral.
But in most cases when a lender says they are giving an unsecured loan what they really mean is the term only applies in certain cases. These lenders take several steps in order to protect themselves if you were to default.
These steps usually mean that the lender is going to ask for a personal guarantee.
The Real Benefit Of An Unsecured Business Loan
The real benefit lies in the collateral. If you are a borrower and you don’t have enough collateral to offer, you can get away with just a personal guarantee when you go for an unsecured business loan and let’s don’t forget the amount you can borrow is usually much higher then you will ever get with a secured loan.
How To Get An Unsecured Business Loan
If you think an unsecured business loan is right for you to follow these steps to put yourself in the best position possible for getting an unsecured business loan.
- Do your research to find the best offers available and compare them to see which offer is the best fit for you.
- Make sure you have good credit. This is very important as this is something lenders use to decide the interest rate and the amount you can borrow.
- Get the paperwork ready. Check the requirements and make sure you have all the necessary documents required by the lender.
- Double check the fine print on the loan offer before you sign anything.
And if you all the above properly you will get the best rates along with the maximum amount of cash possible.
What Happens If You Default On A Lender?
If you were to default on a secured loan, the lender would repossess the collateral that you put up to make up for his losses. However, if you were to default on an unsecured loan, the lender cannot claim your property or assets. But the lender will usually take other actions like hiring a collection agency to collect the debt that is owed or in some cases taking the borrower to court.