Secured vs. Unsecured Loans
Are you thinking about taking out a loan? It will be a good idea for starters to decide which one to choose – secured or unsecured. In most cases, A secured loan is backed by collateral – either an asset or property. Those looking for extra cash are usually faced with choosing from an array of lenders and the type of loans to acquire. It is recommended that the difference between secured and unsecured loans is understood in its entirety to choose from either of the loan options available.
For secured loans, the borrowing party agrees to secure the loan amount’s payment through an asset value equivalent to the loan amount taken out. As this is a credit gamble for the lender, the interest rates on secured loans are usually not as high as those on unsecured loans.
On the contrary, an unsecured loan does not require the borrower to safeguard the loan amount through collateral. However, the loan is extended in such cases based on the borrowing party’s credit history and worthiness. Hence, despite being quick money, an unsecured loan comes with strings attached. To attract a lower interest rate, you must provide the lender with an immaculate credit history for an unsecured loan. Otherwise, interest rates tend to be higher for unsecured loans.
Are Secured Loans a Better Option?
- Lower interest rate: Given the collateral security that seals this loan agreement, secured loans tend to be less risky for the lenders to assure the borrowing party will repay the loan amount. If not, the borrower may be required to forfeit the asset set as collateral, and the lender may offer lower interest rates. On the contrary, an unsecured loan will attract a higher interest rate, provided the more significant risk attached to it.
- Building credit: For those hoping to build credit to enhance their credit history, secured loans are the preferred option. It effectively improves a credit score, lowering interest rates on future loans. In the case of fast loans, the borrowing party is likely to exercise care while paying off the loan amount, as the collateral secured against the loan is at stake. Collateral may be in the form of property or an asset of value. Hence, the payment becomes inevitable on such loans. Paying on time enhances one’s credit score.
- Low risk: Evaluating the loan from both parties’ perspectives – lender and borrower- is essential. From the lender’s point of view, a secured loan comes with a low risk attached. There is little to lose if the borrowing party fails to honor repayment. The collateral may be used to forfeit the loan amount; hence, the lender ends up in a win-win situation.
Based on the benefits discussed above, secured loans are a viable option even for businesses, as they reflect well on financial statements and bookkeeping records. However, secured loans are not a friendly option under all circumstances owing to the lack of flexibility allowed in using funds. In the case of a fast loan, restrictions are usually placed on using the acquired funds.
For instance, if you wish to purchase a vehicle and use the remaining amount to invest in equipment, the lender may not allow the additional purchase by limiting the funds provided. Hence, this may be problematic in situations where flexibility is required. Moreover, choosing a loan with fixed terms, either secured or unsecured, may pose additional penalties to the borrowing party. Selecting a secured loan with variable terms is advisable to avoid penalties.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.