If you are seeking to inject more capital into your business, start one from scratch or simply buy furniture and fixtings for your business, you probably have contemplated securing some form of financing from a lender. If you are seeking for a business loan for whatever reason, there are two options you have at your disposal. You can go for a secured or unsecured type of loan. Generally, a secured loan is backed by some form of security/collateral while an unsecured one does not require you to have any security prior to approval. That said, the basis of this article is to look at unsecured loans as well as outline their merits and demerits.
An overview of unsecured loans
The undeniable fact is that the plethora of lenders offering unsecured form of credit won’t ask you for collateral prior to approval. However, to qualify, they insist that you need to meet credit as well as income requirements. The amount of money an individual can avail under an unsecured loan is dependent on their credit rating or even the size of their business.
Merits of unsecured loans
There is no risk to your personal or business property
The beauty of unsecured loans has to do with the fact that there is no risk to your personal or business property in the event that you default. In other words, you also don’t need to have collateral to avail this type of loan.
Simpler application process
Owing to the fact that there are many lenders other than banks that offer unsecured loans, the application process for unsecured loans is quite simple. In fact, it is possible for you to get an unsecured loan from a peer to peer lender online from the comfort of your office or even home without an inch. In most cases, qualifying for an unsecured loan is dependent on how much income you receive on a monthly basis as well as on your credit rating.
In the case your business files for bankruptcy, it is important to note that a law court might actually discharge unsecured loans but the same cannot be said of secured loans.
Demerits of unsecured loans
Default could lead to worsening of your credit score
The fact that there is no collateral to lose does not mean that if you default on an unsecured loan you go scot free. The truth of the matter is that the lender might actually come after you and even place lien on your property. Additionally, defaults could mean further worsening of your credit score which essentially means that your chances of availing credit in the future is greatly diminished.
High interest rates
Unlike secured loans, unsecured loans attract very high interest rates especially considering the absence of collateral. Lenders charge high interest rates as a way of mitigating the risks on their side. As a borrower, you will end up repaying more than a person under a secured loan would.
Small loan amounts
If you are looking for a huge loan, you will not get it under an unsecured loan. Due to the high risk as a result of lack of collateral, lenders are unwilling to extend huge amounts of money because they stand to lose a lot in the event of a default.
In conclusion, there is no denying that unsecured loans have both merits and demerits. It’s incumbent upon you to weigh the pros and cons and make an informed decision prior to applying for one.