First things first. A LOC line of credit is explained as a revolving loan that can be used by a borrower for different purposes. Basically, a borrower can tap the line of credit according to his/her requirements, pay it back in the given period of time, and get going.
Now, line of credit is of two types: unsecured lines of credit and secured loans. Both of them have some differences and the rate of interest is no exception. Let us understand both of them in detail.
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Explaining a Secured Line of Credit
A secured business line of credit is where the loan is secured and a lender has established a lien in place of an asset. This asset belongs to the borrower itself and becomes collateral. If the borrower is not able to repay the loan in the given period of time, the collateral can be liquified or seized by the lender. Some examples of this option are both car and home loans. Basically, a lender, bank, or private organization will accept the loan application and lend the money to the borrower. But they acquire the collateral in the form of a car or home.
Likewise, an individual or business can acquire a secured line of credit if he/she uses their assets in exchange for collateral. If the borrower is not able to repay, the collateral will be seized and the loss will be fulfilled. A secured line of credit is available at a higher credit limit and less rate of interest. This is because the bank knows how to get back the money they have lent to the borrower.
Explaining an Undersecured Line of Credit
According to the experts, there is a higher risk in accepting applications for unsecured lines or credit. This is because no assets of the borrower are seized. However, a borrower is not able to qualify easily even though they are considered to be the best small business funding option. With that being said, let us understand the differences between secured and unsecured lines of credit more.
Differences Between Secured and Unsecured Lines of Credit
| Basis of differentiation | Secured lines of credit | Unsecured lines of credit |
| Guarantee | This is guaranteed by assets or collateral. | This is not guaranteed by an asset or collateral. |
| Rate of interest | The rate of interest is less. | The rate of interest is high because the lender is at risk. |
| Approval | It is easy to approve this option because the lender will keep the asset of the borrower. | The approval procedure is not easy because no assets are seized by the lender. |
Which Line of Credit to Select?
If you are confused as to which line of credit is apt for you, the decision is completely yours. The deciding factor is the reason you will be using the acquired money for. If you want some money for a day-to-day purchase, an unsecured line of credit is suitable. Both secured and unsecured lines of credit have their own benefits. Keep in mind your financial prerequisites and see which option will work best for you.
