- Lenders issue funds in an unsecured loan based solely on the borrower’s creditworthiness and promise to repay.
- The risk of default on a secured debt, called the counterparty risk to the lender, tends to be relatively low.
- Secured loans require something as collateral, such as your home or your car. Your lender can take this away to pay your debt if you fail to keep up with repayments.
- Secured loans usually have lower interest rates and are easier to qualify for, but they involve more formalities. They’re also more risky, because your lender has a legal right to take your collateral away if you don’t repay on time.
- Unsecured loans are less risky and involve less formalities.
- Unsecured loans are usually a better option if you want a quick injection of finance, want to borrow a smaller amount for a short time, and want greater payment flexibility
- Here no asset is required. These include personal loans, business loans, credit cards and even the overdraft on your current account.
- Here, there is some form of security against the loan, like a property in the case of a mortgage, or a car in the case of many types of vehicle finance.
How Do Unsecured Loans Work?
- When you take out an unsecured loan you and the lender agree to certain terms for repayment, including an interest rate and how long you’ll have to pay back the debt.
How do Secured Loans Work?
- When a loan is secured, it’s connected to something valuable you own. This collateral acts as a guarantee that you’ll pay your debt. If you are unable to repay your loan for any reason, the lender will have the right to take away this asset. They can then sell it off to pay back the debt you owe.
The key benefits of unsecured loans
Note: MaxCap provides unsecured business loans, so all these great benefits will apply to a MaxCap Business Loan….
- The lender does not typically require security in the form of assets such as your home
- Often unsecured loans allow flexibility with loan amounts and repayment terms
- The interest rate (APR) will usually be fixed, so you’ll know exactly what your payments will be every month
- Unsecured finance applications are usually quicker and less complex than their secured equivalents, meaning that capital can often be accessed within a few days.
- Smaller amounts of money are available in unsecured loans, allowing businesses to cover slower periods without committing to lengthy repayment terms that are often associated with secured loans.
- With many unsecured loan you can repay early at no additional cost, and you won’t charge any upfront fees.
- Unsecured loans also offer flexibility on repayment terms, with the added benefits of top-ups and repayment holidays, which won’t normally impact any future borrowing.
Disadvantages of unsecured loans
- Businesses with weaker trading positions are less likely to qualify, as the decision on whether to lend is made against indications that repayment will be possible. This decision is more likely to be in favour of the borrower if a reliable guarantor can be found, but the guarantor’s personal assets are at risk and may be taken if the business that originally borrowed is unable to repay.
- Because collateral is not offered, interest rates are usually higher. An unsecured loan without a guarantor will feature even higher interest rates, as the absence of a guarantee that the loan will be repaid in case of default means the borrower must further offset the risk.
Who are unsecured business loans best suited to?
- An unsecured business loan could be best suited to businesses who do not have high-value assets (or do not wish to offer these as collateral).
- Unsecured business loans give businesses the freedom to borrow money to assist with cash flow, expansion and growth, while maintaining peace of mind that their assets are not at risk.
- An unsecured loan might be a good fit if you require a short term injection of capital and your business and its shareholders have a relatively strong credit history.