Question
What is the difference between a secured and unsecured loan?
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S.No.
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Basis
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Secured Loans
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Unsecured Loans
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1.
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Meaning
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A secured loan is a form of loan in which entrepreneurs borrow money from lenders by using their fixed
assets as security.
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An unsecured loan is a form of loan in which entrepreneurs borrow money from lenders without using any security.
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2.
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Borrowing amount and interest rate
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Provides higher borrowings and the rate of interest is comparatively cheaper and more legal formalities.
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Provides low amount of borrowings and the interest rate is generally higher.
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3.
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Term
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Repayment term is generally longer and it reduces monthly installment.
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Repayment term is generally smaller and monthly installments are also high.
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4.
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Suitable
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Generally this method is good for the purchase of costly assets.
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Generally, this method is suitable for the purchase of raw materials and other less costly items.
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5.
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Repayment
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A secured loan gives the lender a claim on entrepreneur’s asset and if he doesn’t keep up the repayments you could lose his assets (secured one).
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If you fail to repay the loan, the lender cannot repossess any business assets.
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6.
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Decision
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The lender will make a decision to give loan on the basis of security amount of assets.
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The lender will make a decision to give a loan based on entrepreneurs credibility.
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7.
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Examples/ Forms of Loan
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Debentures, Personal loans.
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Personal Loans is the most common form of unsecured loans, which is referred to as all-purpose loans; they are ideal to buy a product for which you do not have ready liquidity. Credit Card Loans Credit card is the most flexible form of short-term borrowings with easy repayment options. Bank Overdraft is also a form by which you can avail unsecured finance from your bank for your business. |
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8.
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Lending Formalities
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More legal formalities to obtain and the value of the collateral must be assessed and verified.
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Less legal formalities to obtain and no need of any verification only the credibility of an entrepreneur must be verified.
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