Loans generally fall into two different categories: unsecured debt and secured debt. What is the difference between the two? And, what are the implications for the borrowers and lenders when it comes to non-payment? Know the difference between secured vs unsecured debts.
Unsecured debt
Unsecured debts are different from secured debts. Lenders grant unsecured debt loans not backed by any collateral. With unsecured debt, the lender can not offset the loan in the event of default with assets. Lenders can only acquire compensation by taking legal action. Unsecured loans are made at greater cost, i.e. at higher interest rates due to higher risk to the lender. Credit scores and debt-to-income analysis are required for these loans to be granted. Credit cards are the most common example of unsecured lending.
Secured debt
With a secured loan, the borrower puts up an asset as surety or collateral. Should the borrower default on loan repayments, the lender can claim that asset as compensation. Mortgages and car loans are good examples of this. With a car loan, if the borrower doesn’t pay, the lender takes possession of the car. If a firm or business doesn’t pay its mortgage, the bank can repossess the building.
Secured vs Unsecured Debt
The primary difference between these two kinds of debt is the presence or absence of collateral. The risk of default on secured debts is lower because the borrower has much more to lose. With unsecured debts, the lender accepts a greater risk, as collecting on them is much more difficult and costly.
Kore Capital Corporation is a business financing company that specializes in offering lines of credit, particularly through factoring, to firms in several different industries. For more information on unsecured and secured debts and their implications, as well as our various financial services, contact us.