Loan types and How does it work?

When we are talking about business whether it is a start-up, a sole proprietorship or a limited liability corporation etc. - the first things comes in our mind is financial condition rather say finance. Now


When we are talking about business whether it is a start-up, a sole proprietorship or a limited liability corporation etc. – the first things comes in our mind is financial condition rather say finance. Now it is very common that one need small or huge amount of hard cash to grow , specially to start-up the business. This the fundamental truth of any business.

Now if you do have the money for your business purpose then there is no problem at all primarily if you looking in financial point of view; but if you don’t then what? Here, my friend, comes the term business loan. Now there are many financial organization available in market to lend money as secured or unsecured loan. If you are considering making a loan or line of credit to finance business you can opt for secured or unsecured option.

Obviously you are thinking that – Loan – ok; Business Loan – ok; Personal Loan – ok; but what those two are.

Unsecured Loan

Unsecured loan is issued and supported only by the borrower’s credit worthiness, rather than by any type of collateral. That’s why it is also called Signature Loan or commonly known as Personal Loan. The unsecured loan is approved within a short period of time because you do not have to give an asset as collateral. Easy approval, few administrative formalities and no collateral are the main features of unsecured loans. Lenders take more risk by making such a loan with no property or assets to recover in case of default which is why interest rates are considerably higher. Examples of this type of loan are –

• Credit cards: Another common way to borrow. Though don’t have a lump-sum money available at the beginning, have a pool of money available.

• Personal loan or Signature Loan: As the name states – secured buy nothing but the borrower signature.

• Line of Credit: Borrowers have a cap on the amount they can borrow.

• Student or Education Loan: As the name suggests, it is for education funding.

• Peer to Peer loan: It allows you to borrow money from some individual rather than a financial institution.

• Small Business Loan: Financial institution lend their money to experienced proven businessman having good credit score.

The most important thing in the unsecured business loan is that lenders believes that you have the ability to repay the loan.


Secured Loan

Loans protected by some sort of collateral or an asset is known as secured loans. Since the guaranteed loan products must be backed by assets, and these assets must be reviewed and verified, it is possible that the approval process takes time. Such initial due diligence is worth it because it will give you the right to a better interest rate. You could opt for a secured loan or a secured line of credit for making major renovations or consolidate your debts, for example.

Secured loan allows you to borrow higher amount money at a better interest rate unlike unsecured loan. As the lender takes less risk you got a cheaper rate of interest for the loan. Given a guarantee to cover credit risk, collateral can take many forms: bonds, shares and even bank loans. While it is mainly used in repurchase agreements ( repos ), it becomes a key element of trade on derivatives markets.

Collateral helps to secure a loan. Lenders use collateral as safeguard. In contrast with unsecured loan collateral loan is here the lender can ding your credit or file a legal action against you. On scrutinize your business credibility, revenues, business history, financial condition and equity contribution when bank or financial institution agreed that you are a viable borrower, approves loans. This should only be used as a last resource — as failing on repay can cost you the collateral.

If you have poor credit or worst credit history though you need money then collateral is the best option for you. There are mainly 4 or 5 types of secured loan—

• Car Title Loan: Pawning upon your car title you can get money easily and fast. Car title loan use your car title instead of your credit score. So if have poor credit that does not hinder your need for loan. Online information are very important while seeking for title loan. As this kind of loan uses your car title valuation of your car and amount cash you need is the key factor. Don’t think that if you borrow car title loan, you cannot drive your car until you repay the loan. No not at all – you can still drive your while paying off for the loan. Car title loan in Orlando is very common.

• Mortgage loan: You have to give your real property documents as the collateral ( like home, car, flat, jewelry etc) as mortgage to the lender to borrow cash.

• Repossession: It is the process property is taken back by the creditor when debtor does not pay debt due on the property such as home loan.

• Foreclosure: It is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower.

• Nonrecourse loan: It is a secured loan where the collateral is the only security or claim the creditor has against the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after foreclosure against the property.

Ariana Smith is the Chief Editor for Real Wealth business. She is very passionate about marketing, small business and advertising.

Review overview