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The low down on unsecured lines of credit and unsecured loans for businesses

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There are a number of things that you need to know about business financing and which type of loans that you are going to apply for, including the difference between unsecured and secured lines of credit and loans for your business.

One of the most basic decisions when it comes to taking out a new loan, is whether to opt of a secured or an unsecured loan. Before we discuss the advantages and disadvantages, you should know that a secured loan means that if you cannot meet the repayments, the lender has access to an agreed security, such as your home or car, to pay off the loan.

This is the huge draw back of secured loans. The asset they are secured over is usually very important to the borrower. For most people, the two most important assets they own, and are least willing to part with, are their home and their car. Your home can act as security whether it is currently mortgaged or not. The size of the loan will also depend on, among various other factors, the value of the asset. For example, if you home is worth £50,000 it is extremely unlikely that a lender will grant you a loan of £60,000. At the same time, just because you have significant assets to secure the loan, does not mean the lender will lend you the full value of the asset. Factors such as your income, your current indebtedness, and your repayment capacity will also be critical.

Secured loans can be used for any purpose, typically debt consolidation or home improvements. However, since the loan is being secured over your home, many short term uses will inappropriate. While borrowing against your home to invest in home improvements may make sense, borrowing against your home in order to buy groceries and pay your day to day bills would not be so appropriate.

Secured loans, as well as being possibly larger than unsecured loans, will also be likely to have better terms and rates. A lender should be more willing to give you a lower interest rate on a secured loan because his risk is less. Should you default on the loan, he can move in on the house, and sell it. He is therefore, virtually guaranteed not to lose the money he lends you. If the loan is unsecured, it is significantly more risky, as should you become bankrupt, he may end up with nothing. While such outcomes are rare, and hopefully will not happen, they are the bread and butter of how interest rates are set.

Lenders will typically be more willing to lend on a secured basis too, for the same reasons. Therefore, if you find that you cannot get unsecured credit, you may try secured credit as a second option.

When thinking about borrowing money, you need to carefully consider all options. Current rates, the amount you need to borrow, terms of repayment and your current obligations can all have a significant impact on your loan choice.

And you'll find that there are many loan options, too - each designed for a specific borrowing purpose. You'll want to be certain that the loan you're applying for is the one that best matches your borrowing needs.

When shopping for a loan, you'll probably hear the terms Unsecured and Secured. What are they? What do they mean? Which is best for you? Read on for the details.

Unsecured Loans
When you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. Granting the loan is not based upon "collateral" - meaning that you do not have to give the lender rights in a specific asset, like your home or car, as security in case you become unable to repay.

Unsecured loans are usually offered at higher rates than secured loans and have lower borrowing amounts.

Examples of Unsecured Loans:

  • Personal Loans

  • -Personal Lines of Credit

  • -Student Loans

  • -Some Home Improvement Loans

Secured Loans
A secured loan is usually needed when borrowing larger amounts to fund major purchases. A secured loan is contingent upon the borrower providing "collateral" to ensure repayment. For example, a popular secured loan is a home equity loan. To obtain a home equity loan, you must give the lender rights in your home as collateral; a mortgage is written against it. Likewise, with an auto loan, you are using the auto as the collateral for the loan. In the case of default, the lender can take possession of the vehicle.

Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans.

As the term implies, a secured loan means you are providing "security" that your loan will be repaid according to the agreed terms and conditions. It's important to remember, if you are unable to repay a secured loan, the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan.

Examples of Secured Loans:

  • Home Equity Loan

  • -Home Equity Line of Credit

  • -Auto Loan (New and Used)

  • -Boat Loan

  • -Recreational Vehicle Loan

  • -Home Improvement Loan

A Dollar Bank Representative will help you determine what type of loan you need for your borrowing situation.

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