- 1 Loan types secured with collateral
- 2 No Collateral, No Problem? The Pros and Cons of Unsecured Business Loans
- 3 Types of Collateral for Different Loans
- 4 Difference Between Collateral Loan And Security Loan
- 5 The Different Types of Loans: A Primer
Loan types secured with collateral
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No Collateral, No Problem? The Pros and Cons of Unsecured Business Loans
For small-business owners, unsecured business loans can be a double-edged sword.
Sure, this type of loan does not require any collateral, meaning you won't have to risk your personal or business assets to secure the loan. But there's a downside: Unsecured business loans come with high costs and large payments. Borrowers should carefully weigh the negatives of unsecured business loans against the positives.
Here are the main pros and cons of getting a business loan without collateral and some tips on how to get funded.
You won't lose assets in bankruptcy: Owning a small business can be risky; about half of all new businesses fail within their first five years, according to data from the Bureau of Labor Statistics.
The biggest advantage of unsecured business loans is that they don't require collateral, meaning you won't have to put your home or another type of asset on the line to qualify for financing. There's more risk when you have assets such as personal savings, business equipment, inventory or accounts receivable backing a business loan. If the loan is secured and your business doesn't make it, you'll likely lose those assets.
Faster access to cash: Because you don't need to supply collateral, lenders won't have to appraise the value of your assets. Funding will likely be much faster, requiring less paperwork and documentation.
In fact, online lenders offering unsecured business loans can get borrowers funded typically within just a few days to a few weeks at most, while secured Small Business Administration loans can take a few months or longer.
Bad credit isn't always an obstacle: Small-business owners with poor personal credit but strong business revenue may be able to get approved, although this will depend on each lender's requirements. If your business doesn't have strong revenue or is new, lenders may require a better personal credit score, as it shows you're a responsible borrower.
The cons: Higher rates, larger payments
Higher cost: Unsecured business loans are based on your credit score and the strength of your business, not on the value of the collateral. Because it would be harder for lenders to recoup their losses if you default on the loan, they'll likely charge you a higher annual percentage rate, the true annual cost of a loan, with all fees and interest included.
Unsecured business loans typically carry double-digit APRs and can go as high as 100%. The rate will depend on your annual revenue, credit score and business strength. In contrast, rates on SBA loans are between 5.75% and 8.25%, depending on the size of the loan.
Larger loan payments: Because unsecured business loans typically carry higher APRs and shorter repayment periods than secured loans, your payments will likely be higher.
For example, a $50,000 term loan repaid monthly over one year at 22% APR would carry a monthly payment of $4,632. The same loan repaid over three years would carry a monthly payment of just $1,858. (You'd also end up paying $11,314 more in interest on the three-year term loan, since it would take longer to repay.)
If you get a short-term loan, your small business would need to have enough cash flow each month to make the larger payment. Failure to repay the loan could damage your credit score, ruin your relationship with lenders and make it much harder to obtain financing in the future.
Smaller loan amounts: You're likely to obtain a higher loan amount with a secured business loan, since the amount is typically based on a percentage of your collateral's value. For example, online lenders offering unsecured business loans typically lend up to $100,000, but secured business loans can get you up to $500,000 or more, depending on the strength of your business, your credit score and the collateral.
This makes secured business loans a better option for purchasing real estate or equipment or for refinancing high-interest debt. Unsecured business loans typically are best for smaller, short-term business expenses, such as hiring employees or buying inventory.
Qualifying may still be difficult: While you won't need collateral, lenders still will want to see consistent cash flow to support the loan payments. Startups with a limited business history and weak annual revenue may have trouble getting unsecured business loans, especially if the owner has poor personal credit or a recent bankruptcy.
Tips for getting unsecured business loans
If you're still interested in getting a business loan with no collateral, here are a few steps to take.
Improve your credit score: Because lenders may focus more on your credit score if your business is new and lacks revenue, you can increase your chances of obtaining the loan if you improve your score. Check out some tips on how to raise your personal credit score fast. Building good business credit can help you qualify for a secured business loan in the future.
Shop around: Comparing lenders will help you get the best deal. Besides the costs of each loan, consider:
- Prepayment fees.
- Fixed or variable interest rates.
- Ease and speed of the application and funding process.
- Whether the lender reports your payment activity to business credit bureaus.
Craft a business plan: It doesn't hurt to develop a business plan that details exactly how you'll use the loan proceeds and shows your projected profits for the term of the loan. Lenders will appreciate that you've given a lot of thought to repaying the loan on time and in full.
Avoid costly providers: Think twice before considering merchant cash advances. This type of unsecured business loan comes with high approval rates and quick access to cash, but it's the most costly form of small-business financing, with APRs typically in the triple digits.
Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @StevenNicastro.
To get more information about funding options and compare them for your small business, visit NerdWallet's small-business loans tool page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet's Ask an Advisor page.
Types of Collateral for Different Loans
Collateral is a security in the form of an asset or property offered against a loan. Financial institutions require collateral for mortgages and other secured loans, including foreclosure, non-recourse loans, and repossession. If the borrower stops making payments, the financial institution can take possession of the home or vehicle pledged.
The collateral can be equal to, less, or greater than the value of the loan. This depends on many factors, including credit score, income, and how liquid the asset is. Applicants can pledge anything of value, including real estate, vehicles, inventory, stocks and bonds, and equipment. Intangible and tangible properties are accepted by financial institutions. Tangible properties include machinery and equipment, fixtures, annuities, art, jewelry, etc. Intangible properties include investment funding, chattel paper, and payment rights.
Types of Collateral Depending on the Loan
The collateral required depends on the loan type and amount. Financial institutions that offer non-recourse loans accept stocks, real estate, jewelry, and vehicles. Companies that apply for commercial loans can offer marketing securities, natural reserves, real estates, and other assets. Some businesses use personal assets such as land and residential properties to secure financing. Companies that apply for a large loan may offer estate such as warehouses, office buildings, hotels, and shopping centers. Natural resources such as coal, gas, and oil are also used for long-term loans and before launching large-scale projects. Corporations, large companies, and syndicates often use machinery and factory equipment when applying for large loans. Certificates of deposit, treasury certificates, bonds, and stocks are used as collateral because they can be easily converted to cash. The amount of the loan offered depends on the value of the security.
Whether a limited partnership, public liability company, or sole proprietorship, most businesses apply for a commercial loan. Offering collateral is one way to prove to financial institutions that the company is a viable borrower. Before deciding on the type of loan to offer, financial establishments look at equity contributions, assets, revenues, credit history, and the company’s balance sheets. Most banks require collateral even if the company has a good credit rating.
Financial institutions take a conservative approach when valuing assets to be pledged as collateral. The reason is that they will have to expend resources in case of default. Banks consider the fair market value of the asset and not what the company paid for it. It is a good idea to use the services of an independent appraiser. This is important if there is a substantial difference between the bank’s appraisal and what the asset is worth in the view of the company’s management.
Companies and individual borrowers can use two types of collateral – assets they’ve already pledged and assets and property they own. Financial institutions prefer property for which the borrower has a title of ownership. They accept different pieces of equipment and real estate, including second homes, motorcycles, trucks, and watercraft. Most banks won’t accept vacant land.
Borrowers who apply for a car loan can pledge the vehicle, their home, bond or stock certificates, etc. In addition to these types, applicants can pledge collectibles and valuables, insurance policies, cash and savings accounts, and future payments. Some assets are more heavily discounted than others. For instance, financial institutions may recognize 50 or 75 percent of the borrower’s investment portfolio. The reason is that banks risk losing money in case the investments drop in value.
There are benefits to pledging an asset to secure financing. First, secured loans come with a lower interest rate and a longer repayment period than unsecured debt. Banks face less risk in case of default and can repossess the property or asset pledged as collateral. With unsecured debt, financial institutions offer loans based on the applicant’s creditworthiness. Second, borrowers can use the money in many different ways - to pay bills, go on vacation, buy a house or vehicle, pay their tuition and board, or repay an expensive loan. Third, secured loans are easier to qualify for and even borrowers with a poor or imperfect credit score may be eligible. In fact, this is a good way to rebuild credit by making timely payments. Finally, the borrower can repay the loan at any time and save on interest payments.
Auto loans are used by individual borrowers and businesses to purchase a used or new vehicle. The main types are unsecured and secured whereby the vehicle itself serves as collateral. Types of Car LoansDealerships and financial establishments offer auto loans with variable and fixed rates. Fixed.
Financial institutions offer different forms of financing to borrowers who plan to purchase land. Applicants can choose from different types such as bridge financing, hard money, improved land, and raw land loans. Financial Institutions and Other LendersLoans are offered by private parties and.
Secured debt is offered in the form of mortgages and other loans that require collateral. Financial institutions extend financing to individual borrowers and businesses and feature lower interest rates. Banks face lower risk when collateral is offered and can recover it in case of default. Types of.
Personal loans are offered to individual borrowers rather than companies and corporations. Financial institutions such as commercial banks, credit card companies, savings and loan associations, and credit unions offer financing. Loans come in the form of unsecured and secured debt. Loan TypesThe.
Difference Between Collateral Loan And Security Loan
When I approached bank for taking loan for the first time, the loan manager discussed different financial terms like security, collateral, mortgage, Lien etc. Frankly that time these all terms were alike for me as I was not aware what is the difference between these terms and how it matters in my loan request. So I decided to have a clear understanding of all these terms to make right decision. So lets have a look what all I gathered for myself and for my readers. Lets first start with the difference between collateral and security.
Earlier when farmers use to approach mahajans for loan, they had to pledge there land as security to the lender. The same happens now, whenever we approach banks for the loan requirement they ask to pledge collateral or security for the loan. But what is the difference between these two terms?
Before moving to understand the difference between collateral and security lets first understand the need for this. While taking loan borrower commits to repay the loan amount with interest in time but to ensure the amount paid as loan will be recovered, lender takes an asset as security from the borrower which ensures there will be no losses in case borrower defaults.
Collateral is an asset owned by the borrower which act as a guarantee against the loan amount borrowed. In simple words, collateral is an asset which borrower pledge to the lender as a security against the loan. In case borrower failed to pay back the loan amount to the lender, lender can sell the asset to recover his loan amount hence reduces the risk of lender.
The assets that can be pledged as collateral can be automobiles like car or bike, real estate like housing or commercial property, cash accounts, investments, insurance policies, valuables and collectibles,or future payments. Lender can grants loan amount equivalent or less than the value of the collateral depends upon the type of collateral. If borrower pledge market link investment as collateral than borrower may grant only 50 to 60% of the investment amount as loan. This will improve the chances of getting the loan amount back even if investment lose value.
Like collateral loans there are some loans which can be taken by pledging securities such as bonds, stocks, futures, forward, options etc. In this security based lending, borrowed pledge his securities portfolio as as guarantee against the loan amount borrowed. In such case borrower can take the interest amount, bonus, dividends, capital gains etc. but not allowed to trade securities.
Each bank decides what all securities can be pledged against the loan. The loan amount that bank gives against the stock portfolio ranges between 50 to 80% of the value of the portfolio. Bank will issue a current account from which you can withdraw money and you will be charged interest only on the amount you withdraw.
In case of borrower defaults on the loan, lender can sell his portfolio to recover the amount of loan.
Some banks accept shares in physical form whereas some accept in dematerialized form.
Features of Loan Against Security
- Loan against security is good to fulfill short term financial need.
- The interest rate on loan against security depends on the prevailing rate in the market.
- Borrower can spend the money borrowed the way he wants to.
- The minimum amount of a loan against securities is Rs 1 lakh while the maximum amount is Rs 20 lakh (in case of dematerialized shares) and 10 lakh in case of physical shares.
- Value of security are valued every week to see the maximum limit of loan available to you.
Collateral loan vs. Security loan
- Collateral are more stable than securities due to which the value of collaterals does not fluctuate as frequently as the value of securities which makes securities more risky than collateral for the lender.
- Collateral can offers higher loan amount whereas the maximum loan amount on securities can be Rs 20 lakhs.
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The Different Types of Loans: A Primer
The other day a friend of mine asked me about different loan types, as she was on her way to the bank to consolidate some high-interest credit card debt. I was surprised at the seemingly elementary questions she was asking — she is an intelligent well-established gal who is pretty good with numbers (the credit card debt is another story).
It made me realize that maybe she is not alone. Although you may know what the various debt vehicles and loan types are, do you know all their inherent characteristics? If you’re not sure, here is a loan primer to refresh your knowledge.
All loans, no matter what they are, are either secured or unsecured.
These are secured (or borrowed) against an asset you own, such as your home, which is offered up as collateral. Ultimately if you default on the loan, the bank will get their money back by way of foreclosing your house (or otherwise seizing the collateral).
The interest rate should be very low (and often negotiable), hovering close to prime rate. The better your credit rating is, the more bargaining power you have with the terms, including loan amount and repayment period.
Payment terms are flexible, and can even be structured as “interest-only.9rdquo;
If the loan is secured against the equity in your home, the application process usually involves a “drive by appraisal” of your home and some legal fees, that together amount to a few hundred (up to a thousand) dollars. As such, it’s usually best to apply for a higher loan qualification amount than you think you need (as long as you know yourself well enough not to get into more debt unnecessarily). This way if you wish to borrow more money later on, new appraisals and legal fees can be avoided.
Examples of secured loans:
- Car loans
- Boat (and other recreational vehicle) loans
- Home equity loans
- Home equity lines of credit
These are (as they sound) not secured against any assets. The bank can only utilize collectors (and freeze your accounts) if you default.
The loan amount granted is largely attributable to your credit history and income/assets/debts at the time of application. There is a considerably higher assumption of risk on the bank’s part with an unsecured loan. Thus, the interest rate is much higher.
Examples of Unsecured Loans:
- Personal loans
- Personal lines of credit
- Student loans
- Credit cards/department store cards
There are a few different ways the bank can lend you money.
Similar to a credit card,you are given a maximum allowable balance, and each month you can borrow as much as you wish from the line of credit up to the maximum.
Monthly minimum payments vary from a percentage (e.g. 3%) of the outstanding balance (as for most unsecured lines of credit), to as little as interest only (as for some secured lines of credit).
You can pay as much as you wish above the minimum payment amount, whenever you wish.
Some lines of credit come with checks, or can be linked to your bank card for debit transactions.
Can be secured or unsecured.
Conventions loans include personal loans, home equity loans, car loans, etc.
The repayment terms and amortization is pre-determined and consistent. For example, a $5,000 loan payable over 3 years in equal payments at 8% interest.
You cannot add to this loan without applying for a new loan entirely.
You can usually pay off the loan faster than schedule without penalty.
Monthly minimum payments will often be higher than they would with a Line of Credit, due to the shorter amortization (period of time to pay it back).
Can be secured or unsecured.
Mortgages are always secured loans, with the collateral usually being real estate. They are for large amounts of money, and are payable over long periods of time.
Maximum amortizations (repayment periods) for a mortgage range from 25 to 30 years, depending on where you live.
You can borrow up to a certain percentage of the appraised value of the property, subject to some restrictions and insurance provisions.
Interest terms can be either fixed or variable. Fixed interest locks your rate in for a fixed period, typically five years. Variable interest rates will fluctuate with the prime rate, and have little to no lock-in period.
The penalty to break a fixed rate mortgage mid-term can be outrageous. So if the interest rates go down dramatically, you are stuck with the rate you have until the term (e.g. five years) is up. On the flip side, if the interest rates go up dramatically, your interest rate is protected for the duration of the term.
All the interest is paid up front. In the first few years of having a mortgage, almost all of your payments are comprised of interest, with only a few dollars reducing the principal. It is not until the later years of a mortgage that the reduction of your principal loan amount picks up momentum.
Althoughp you can’t always repay as much as you wish, you can usually make additional payments which directly reduce your principal loan amount.
Known in some circles as the antithesis of all things good and pure, credit cards tend to get a bad rap. Depending on how they are used and abused, they can admittedly be bad news.
You are allocated a maximum balance, with freedom to charge as much or little to it within the limit.
Standard credit cards are always unsecured, so the interest rate is high: usually 9-19% (with the average being closer to 18%)
The minimum payment is usually quite small — expressed sometimes as a percentage of the outstanding balance, but in some cases it is little more than just the interest.
Ifyou pay off the balance in full before the due date, you are not usually charged any interest (this depends on the credit card).
Each type of debt serves a specific purpose, although they can be interchanged depending on your situation. The most important thing in managing your debt is to be realistic about what you can handle. Underestimate the amount of money you have to pay towards your debt each month to be safe, in order to avoid getting in too deep.