Secured loans and unsecured loans essentially differ in that a secured loan will be offered against the security of such as a property whereas an unsecured loan will be free of this requirement. There are more differences as to how the loans work in practise, however, which any potential applicant should always take in to consideration.
When a secured loan is applied for, the applicant will be required to offer the company something as a security against any default on the repayment of the loan. This will usually take the form of such as the family home or business. This would mean that in the event of the borrower being unable to keep up repayments on the loan to a serious extent, the bank or loan provider would be able to lay claim against the security in order to recoup their funds. The legalities involved in setting up a secured loan can mean that several weeks can pass from the time of application for the loan to the point where the funds are actually released.
An unsecured loan is different in the sense that although the borrower would of course be subject to legal action in the event of their defaulting on the loan repayments, the lender would have no direct claim upon their assets. Unsecured loans therefore require less legal underwriting and are usually available – subject to approval – within a much shorter period of time.
Secured loans consequently provide the lender with a far greater level of protection than unsecured loans. For this reason, the interest rate charged on a secured loan is likely to be less than on an equivalent unsecured loan, simply because the level of risk is much lower.
Secured loans are likely to be subject to a much higher minimum loan amount threshold than unsecured loans. This is because of the legal costs of setting up a secured loan in comparison to an unsecured loan and the requirement for granting the loan in the first instance to make good business sense to the loan provider.
Although secured loans are almost certain to prove cheaper over an equivalent term than their unsecured counterparts, a prospective borrower should weigh up the implications very seriously before entering in to such an agreement. They have to know that any future financial difficulties could not just result in perhaps difficulty in making monthly repayments but the loss of their home or business as well.