A loan is one of the effective ways to finance your objectives or meet sudden expenditures. As you might know, different types of loans are available in the market, serving various purposes. For example, a car loan funds the purchase of your vehicle, whereas a short-term property loan is available to assist your business with urgent funding requirements. Besides these, you can also take out a personal loan for any consumer purpose.
But each of these different funding types is based on the security required by the loan lender. Accordingly, your loan might get classified as an unsecured or secured loan. As a result, when looking for options for a loan, you should know the difference between secured and unsecured loans. So, if you are wondering about the prominent distinctions between the two, read the article to find out more and then select the most suitable loan type according to your requirements.
The difference between secured and unsecured loans
Let us now check out the primary differences between unsecured and secured funding.
A secured loan is a funding type that requires borrowers to submit collateral or security. To have the loan approved, lenders require security in the way of property, vehicles, business invoices or machinery and equipment. This funding is a common way to borrow a lump sum of money. Contrary to the above, an unsecured loan does not require collateral or security. If you apply for an unsecured loan in Australia or the lender does not require any type of asset to be used as security to approve the loan application. An unsecured loan is an outstanding alternative for borrowers who require borrowing money but have no collateral. In simple words, if you do not have assets, you can still secure the money you need.
· Interest Rate
Another notable discrepancy between a secured short-term property loan and an unsecured loan is the interest rate. The first funding type generally comes with a lower interest rate as the borrowers need to offer their valuable assets to secure the loan. On the other hand, as you do not need to put up your collateral to get money from unsecured loans, this funding type comes with a higher interest rate. This is because approving the application of unsecured loans has risk from the lender’s perspective.
If you are applying for a secured bridging loan in Australia, you can be approved without many complications. The eligibility criteria for secured financing are flexible. If you have collateral or security, you can obtain funding at a reduced interest rate. But unsecured loans can be harder to acquire. As you do not offer collateral, you should have a well-planned business strategy and a solid credit score to access the loan. In other words, you must prove to the lender that you are a responsible and creditworthy borrower and can repay the loan in time with applicable interest and other charges.
· Required Documents
Another significant difference between these two loan types lies in the required documents. While applying for secured finance, you do not need to bother submitting many documents. This is because the lenders have an interest in your asset rather than documentation. So, you need to offer fewer documents while taking out this financing option. However, applying for an unsecured loan requires more documents as you are not offering security for the loan. Some lenders require you to offer a business plan, profit and loss report, credit report, personal and business financial statements, and so on to support the loan.
· Processing And Funding Times
Generally, while applying for either a secured short-term property loan, or an unsecured business loan processing and funding times are very quick if you use private lenders. While a bank can take a long time to approve and fund the loan, private lenders make the processing of either a secured or unsecured loan easy and faster. You can expect the money to get credited to your bank account within 24 hours of loan approval.
· Loan Repayment Term
While learning about the difference between secured and unsecured loans, you must consider this distinction. Secured business loans usually have longer repayment term, as they vary between 1 month to 2 years. In general, secure funding offers a borrower more flexible loan terms than an unsecured loan. But in the case of unsecured loans, you need to repay the entire loan amount within 1 years. However, several lenders might give you less time than that for repayment.
When applying for a secured loan, you have risks to consider, as the lender might seize your collateral or asset if you fail to repay the loan or default under the agreement terms. Due to this, you should considering taking out this kind of finance if you are sure, you can repay it on time. However when you take out an unsecured loan, you do not have the same risk to your security, but the lender has. When condiering your options you should find a loan that meets your capacity to repay and requirements.
So, whether you are applying for bridging loans in Australia or any other funding type, you should consider the differences between them. Besides, you also need to understand that both loans have different criteria and features. If a business opts for secured finance, it can mean that the amount required is large and the lenders need security. However in an unsecured loan, a business or a sole trader can take advantage of smaller loan sizes without the need for security involved. So, in the end, it is needless to say that you must weigh up the differences, consider the pros and cons of both, and then select the best one to get the best out of the loan type for your buusiness.