Unsecured term loans are not secured by collateral, but secured loans are secured by some type of collateral, these loans are also called collateralized loans.
Examples of collateral
Secured loans will normally have lower interest rates and cost than unsecured loans since it's secured by some form of asset that the lender can sell in the event the business defaults on the loan. Many small businesses find it more difficult to get approved for secured loans because they lack the assets for a lender to resell in the event of default. A lender doesn’t always require a business’s owner to personally guarantee a secured loan, since the asset will generally provide that security. Additionally, secured loans typically have the highest loan amounts and longest terms.
Unsecured term loans will normally carry a higher interest rate and cost than a secured loan since if the business defaults on the loan, there is no guarantee that the lender will be paid any portion of the outstanding loan balance, and the lender has no asset to sell. It is very common that a lender that offers a business an unsecured loan will require the business owners to personally guarantee the loan. This means that if the business defaults on the loan, then the lender will have the right to pursue the business owners directly and personally to demand loan repayment. The maximum loan amounts for an unsecured loan are generally less than a secured loan and the term will also be less.
Whether your business is pursuing a secured or an unsecured loan, be sure to read our article “Tips to getting approved.”
