Applying for a small business loan can impact the success of your business. Having a bit of extra cash can ease up the expenses. Similar are personal loans. You can improve the quality of your life by buying a new car, fixing up your home, or taking a dream holiday. If you are new in the financial market and applying for a loan for the first time, you must understand a few basic terms. One such thing to understand is the difference between a secured and unsecured loan. You will know in detail about this by the end of the article.
Primary differences between unsecured and secured loans
We will consider personal loans while trying to understand the difference. Suppose that you like a brand new car in the market, but you do not have enough funds in the bank to purchase it. You can become a car owner by applying for a personal loan. In a secured loan, the lender can seize the vehicle in case of repayment failures. Some secured lenders also ask for an asset to be used as collateral in case you do not repay. You do not risk anything you own or buy with an unsecured loan.
Let us know the differences between the two types of business loans in Australia in more detail:
1. Restrictions on the assets that you can purchase
A secured mortgage lender has restrictions on what you can and can not buy. In a car loan, the restrictions are on the car type you can purchase. These restrictions change from lender to lender. However, the one that is common amongst all is that you have to buy a new one that is only a couple of years old. If the vehicle passes a few tests, the lender will also allow you to purchase a bit older vehicle.
Small business loan lenders can put other restrictions as well. For example, some banks may pass the loan only when the loan is more than $10,000. Some lenders fund only cars and not trucks or motorbikes.
There are no such restrictions in an unsecured loan. If you need a small amount of money to buy an old car, that is up to you. You can buy what you need with this loan type. You do not have to offer any security for the loan.
2. Usability of the loan for several purposes
A secured loan restricts the borrowers to usability. It will only be for the amount that the car costs. You get a bit of leeway with an unsecured loan. The extra money needed for things like repair or upgrades that your car needs are covered.
An unsecured loan provides you with what you need. It is more flexible in terms of usability. If you go for a car loan, there are many stipulations. One to mention is having a lot more flexibility. You get to choose the model of the car, the year of manufacturing, and the amount you wish to borrow. Lenders cooperate and adjust the needs according to the requirements of the borrower.
3. Fees, the rate of interest, and repayment time
Secured business loans in Australia require you to attach an asset to the loan application. As the name suggests, they get secured by collateral. Because of this assurance, the lenders offer a lower rate of interest. Other charges are usually similar in both kinds of loans.
Although unsecured loans have higher interest rates, they tend to have better rates than credit cards. In terms of borrowing, this factor makes them a better middle ground. Both the loans have fixed dates for paying back the money. It is a brilliant method that helps you plan your expenses and future budgets accordingly.
4. The difference in the time of application
Any small business loan types: secured and unsecured, have a specific processing time depending on the lender. An unsecured loan offers more money a lot quicker than its counterpart. It is because the conditions that the borrowers have to meet are much less.
In Secured Loans, the borrowers should meet various requirements to qualify for the loan. The advantages like lower interest rates come at the cost of longer application processing times. The lenders offer stricter rules and regulations that one should meet during the application procedure. Since more paperwork has to be done and checked, the processing time here becomes more than in unsecured loans.
Unsecured loans are not that quick to be relied on in case of an emergency. However, it is equally true that these are easy to get.
5. Requirement of collateral
Secured business loans in Australia require the borrower to present security for the loan. Collateral is any asset that you can use as security. In case of repayment failure or any loan default, the lender has the right to recover their loss by selling these assets. Even if you have paid 90% of the car loan amount, the lender can exercise these rights.
What if you do not own any asset, or you do not want to risk it? It is what unsecured loans are for. You do not have to provide any sort of collateral to the lender. Unsecured loans normally come with higher interest rates.
Secured and unsecured loans come with both drawbacks and conveniences. Choose a lender who offers a loan adapting to your situation and a loan type that will meet your current circumstances, whether you are getting a business loan, car loan or a personal loan.