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Secured Vs Unsecured Business Loans: The Difference and How it Matters for SMEs

By Finserv MARKETS - Apr 26,2019
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Secured Vs Unsecured Business Loans

Small and Medium Enterprises or SMEs often need additional capital for their growth and sustenance.  In such scenarios, the fastest and easiest way to get capital is to apply for a personal loan. With the onset of multiple lending agencies, SMEs have a plethora of when it comes to borrowing money. However, one should never take such decisions in haste and borrow money only from authorised and reputed financial institutions.

What sort of personal loan should SMEs apply for? 

Personal loan broadly has two categories – Secured and Unsecured.

Secured Loans

A category of personal loan is defined as a loan in which the borrower keeps some asset with lender until the loan amount is repaid along with the interest. This category of personal loan offers lower interest rate as there is less risk involved in case the borrower defaults. The lender will be able to recover the lost money easily by disposing the assets that have been pledged by the borrower.

Unsecured Loan

This category of personal loan has high interest rate as there are no assets pledged against the loan. The loan gets sanctioned only the grounds of CIBIL score, income flow and previous financial history. Before applying, you need to check your CIBIL score for business loan. The risk factor here is high because there is no easy way to recover the money if the borrower defaults. Despite offering high interest rates, unsecured loans are preferred more in the SME industry because of the following reasons:

  1. Unsecured loans are available for shorter tenures.
  2. The process to get an unsecured loan is easier as it can be acquired online without physically submitting any documents.
  3. Unsecured loans are processed faster.
  4. Under unsecured loan there are no hidden charges, only the processing fee and the interest rate.
  5. Repayment options are more flexible in unsecured loans.

Difference between Secured and Unsecured Loans:

  1. Secured Loans need collateral whereas unsecured loans don’t.
  2. The interest rate for secured loan ranges from 12% – 24% whereas for unsecured loans it is 18% – 24%.
  3. The processing fee for secured loans is 2% or less but for unsecured loan the same is 2% or more.
  4. Secured loans may have extra charges for documentation, loan insurance and other statutory requirements. Unsecured loans have no hidden charges.
  5. Secured loans take time for disbursement and may take up to six weeks but an unsecured loan (if approved) is in your account within 72 hours.
  6. The application process in secured loans is time consuming whereas it’s completely digital for an unsecured loan, therefore, faster.
  7. Repayment of secured loans are done through EMIs but for unsecured loans there are flexible repayment options.

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522