There are three types of commercial facilities based on the type of collateral deposit requirement. They have secured loans, unsecured loans, and self-secure loans. They each have their advantages and disadvantages. Each may be more suitable for different types of loans.
According to dealstruck.com, the advantages of secured loans make it more suitable for a business loan. Secured loans have lower interest rates, less strict requirements on credit rating, longer repayment length, large amounts available for borrowing, and flexibility on collateral used.But before we look at the benefits of getting a secured loan, it would be great to learn how to get a loan in the first place. According to this guide, however, there’re various well-trodden paths that you can follow to acquire the right loan for your business.
The interest rates of secured loans are relatively lower than those of unsecured loans. The lower interest rate is as a result of the less risk involved in comparison to an unsecured loan.
The risk is lower given that the institution offering the credit facility has the title of the asset used as collateral in securing the loan, and it can quickly be sold to recover the amount advanced in case of default. This is impossible in the unsecured loan as there’s no collateral deposited with the credit-issuing facility.
Requirement on credit rating
Secured loans give less emphasis on credit rating or debt to income ratio, in contrast to unsecured loans that solely depends on the credit ratings and obligation to income ratio while deciding whether to advance a credit facility or not.
It’s because secured loans give facilities based on the value of the asset used as collateral while unsecured loans look at other subjective factors such as income level, credit repayment history, and debt aversion to determine credit-worthiness before lending money.
Longer repayment length
The repayment period of secured loans is relatively longer. The duration taken to repay the debt could run into decades such as in mortgage loans, unlike unsecured and self-secure loans.
The extended period of repayment is because of the lower risk involved in secured loans and the relatively lower interest rates offered. Due to the low-interest rates, it makes more business sense to spread the repayment period wider.
Secured loans are more flexible, especially in terms of the amounts available for borrowing and type of asset deposited as collateral. The amount borrowed could be few thousands or hundreds of millions, or even billions, while assets used as security could vary from physical, tangible assets such as real estate and motor vehicle to intangible assets such as shares and treasury bills.
Flexibility in terms of money borrowed is possible given that the amount reflects the value of the property used as collateral. The higher the price of the guarantee used, the higher the amount advanced as loan and vice versa. The assets used as collateral also vary mostly depending on the availability of the asset and the nature of the facility sought. The assets would range from invoices to motor vehicle and real estate properties.
An already established, grounded, and vibrant asset business is therefore suited to go for a secured loan due to the advantages it has over other types of loans categorized based on the requirement for deposit of security.