The differences between secured and unsecured loans

If you’re looking to take out a business loan, one of the first things you should consider is whether you want the loan to be secured or unsecured. In fact, these are two main types of small business loans. The biggest difference between the two is that secured loans require collateral. However, there are other subtle differences you should be aware of before making a decision, as we’ll discuss below.

Examples of secured loans

Secured loans require collateral, which can mean anything from property or vehicles to equipment and stocks. The collateral serves as security for the loan and reduces the lender’s risk. If the borrower defaults on the loan, the lender can then seize the collateral and sell it to recover the money owed.

Some common examples of secured loans include mortgages, asset finance and invoice factoring. The lender will typically require a valuation of the asset to determine its value and the loan amount. If you can provide security on a loan it often means you can borrow a larger amount, or get better terms or rates. 

Examples of unsecured loans

Unsecured loans do not require collateral. Instead, lenders rely on the borrower’s creditworthiness to determine their ability to repay the loan. As there is no collateral, you may not be able to borrow as much, or you might be charged a higher rate. However, they are usually faster to set up and more flexible. 

Examples of unsecured loans include overdrafts, credit cards and Funding Circle loans.. The amount you can borrow and the terms you’ll receive are typically based on your credit score and the financial health of your business. 

The key differences between secured and unsecured loans

Understanding the difference between a secured and unsecured loan can help you make the right choice for your business.

Collateral

Secured loans require collateral, while unsecured loans do not. This means that if you default on a secured loan, the lender can seize the collateral to recoup their losses. With an unsecured loan the lender has no collateral to fall back on, so they may ask for alternatives, such as a personal guarantee.

If you choose to take a secured loan, the lender will likely place a charge on the collateral you put down. If this is a vehicle or a piece of equipment, for example, it may make it harder to sell that asset until the loan is repaid. With an unsecured loan, you could keep total control over your assets.

Unsecured loans could be a good option if your business does not have valuable assets that can be used as security. Or if your assets have already been borrowed against. 

Interest rates

Secured loans typically have lower interest rates than unsecured loans because they are less risky for lenders. However, the interest rate you receive will depend on your credit score, income and other factors.

Repayment terms

Secured loans often have longer repayment terms than unsecured loans, which helps if you are borrowing a larger amount. However, unsecured loans can be more flexible. Funding Circle loans for example come with no early settlement fees, giving the option to pay off your loan early at no extra cost. 

Loan amounts

Secured loans may allow you to borrow larger sums of money than unsecured loans, which can help you make an investment in equipment or machinery that wouldn’t be available otherwise. For example, you can apply for asset finance through Funding Circle of up to £5 million. 

Unsecured loans, however, are also available in significant amounts, with Funding Circle loans ranging from £10,000 to £500,000.

Purpose of loan

Both secured loans and unsecured loans can be used for a wide variety of purposes, and choosing the best for your needs is important. If speed and flexibility is important, an unsecured loan is likely the best bet. If you want to buy a new vehicle, a secured loan via asset finance may be most affordable.

Application

Unsecured loans are typically faster than secured loans because they do not require valuation of assets. This process with secured loans can take time, delaying the loan approval process. 

With unsecured loans, the lender typically relies on the borrower’s credit score and finances, which can be assessed more quickly. For example, you can apply for an unsecured loan at Funding Circle in 10 minutes and get a decision in as little as 1 hour. 

Summary

When deciding whether to apply for a secured or unsecured loan, it’s important to consider your financial situation and goals. If you have collateral to offer, or will use the loan to buy assets, a secured loan may be a good option as it often comes with lower interest rates and longer repayment terms.

If you don’t have collateral, an unsecured loan may still be a good option, providing faster payouts and more flexibility. Additionally, your creditworthiness, income, and other factors will also play a role in the type of loan you can qualify for and the interest rate you receive.

Secured and unsecured loans at Funding Circle

You can apply for secured and unsecured loans for your business through Funding Circle.

Unsecured business loans – Borrow up to £500,000 for almost any purpose. You can apply in 10 minutes and get a decision in as little as 1 hour. A personal guarantee will be required.

FlexiPay line of credit – Spread costs over 3 months with a line of credit of up to £250,000

Asset finance – Borrow up to £5 million to buy or lease new assets such as equipment, vehicles or machinery and use the asset as security. 

You can check your eligibility today for a small business loan from Funding Circle in 30 seconds.