Secured vs. Unsecured Loans: What's the Difference?
Updated: Sep 23
With so many kinds of loans out there, it can be hard to know which ones you're best qualified for, let alone which require collateral and which don't. However, it's extremely important to understand this distinction if you're serious about securing financing for your business.
Collateralization is simply the use of an asset as collateral when securing a loan. If a borrower is unable to pay back the loan according to the initial agreement, the lender can seize the asset and sell it to offset their loss. However, there's a little bit more to the difference between secured and unsecured loans than that. Here is a quick overview of the potential of secured vs unsecured loans.
Secured vs. Unsecured Loans: How Do They Work?
Secured Loans
Qualification: Because secured loans provide lenders with more security, they're easier to qualify for than unsecured loans. To qualify, a lender will consider your credit score, history, income, debts, and the value of the asset(s) you're offering as collateral. The more valuable an asset a borrower offers as collateral, the more confident a lender is that they can recover the loan if needed.
Rates: Secured loans often have significantly lower annual percentage rates than unsecured loans. The rate is determined by the same factors as the qualification criteria, so the more valuable your collateral is, the better rate you'd get.
Repayments: Secured loans are typically repaid in fixed monthly installments over the course of a few years. Payment amounts can vary by lender.
Risk: Should you default on a loan, your credit score will suffer, and the collateral can be seized by the lender.
Uses: You can use a secured loan for almost anything, from small home improvement projects to debt consolidation.
Unsecured Loans
Qualification: To qualify for an unsecured loan, you need to have excellent credit. In addition to your credit score and history, lenders will review your income and debt-to-income ratio to see if you qualify.
Rates: Unsecured loans have fixed rates that range from about 6% to 36%, with the lowest rates going to the most qualified borrowers.
Repayments: Like secured loans, unsecured loans are paid back in fixed monthly installments over the course of a few to several years.
Risk: Since there is no collateral, unsecured loans carry more risk for the lender, but less risk for the borrower. They're a safer choice for many borrowers because their credit score is the only thing affected if they fail to repay the loan according to the initial agreement.
Uses: Unsecured loans can be used for just about anything.
Looking for an unsecured business loan? Jumpstart Finance can help you access the funds you need. Submit your inquiry here and connect with a Loan Advisor today.
