The purpose of a line of credit or LOC is to allow individuals and businesses the chance to borrow money. Financial institutions use the method to support the need to purchase, invest, or pay off expenses. In choosing to get LOC, you need to know that the arrangement comes in two forms: secured and unsecured. Here are ways to differentiate secured and unsecured personal lines of credit.
Availability of Collateral
One of the significant distinctions between the two personal lines of credit is the availability of collateral. Secured personal lines of credit provide a person or business a loan and there is a corresponding asset that becomes part of the agreement between borrower and lender. The asset is called collateral and can become subject to seizure or liquidation if one fails to meet payment scheme. Land, properties, and cars are examples of guarantee accepted by financial institutions. An unsecured personal line of credit, on the other hand, operates without collateral. People can borrow up to a certain amount as long as it falls within their credit line.
Flexibility and Credit Limit
Another difference between the two is flexibility and credit limit. Though both personal lines of credit provide opportunities to access credit, there are certain limitations given to unsecured line. For instance, secured lines provide better flexibility to individuals and businesses to seek higher credit because an asset serves as a guarantee. Unsecured line of credit offer flexible options but continue to depend on the individual’s capability to pay and credit history. Since the decision comes from lenders, people might not always get the approval that they want. The same process applies for credit limit where a secured line receives higher limit with lower interest rates.
Reputation and Credibility
The two personal lines of credit also differ on how it manages reputation and credibility. For secured personal lines of credit, lending agencies do not focus on an individual or a business reputation. Their ability to provide an asset as a guarantee provides creditors the chance to recover the money loaned. On the contrary, an unsecured line recognizes the importance of credibility before allowing the release of large credit. That is why lenders give high credit limits to reputable businesses or individuals who are capable of paying off their debts.
Exposure to Risk
Lastly, there is the concept of risk that connects with both personal lines of credit. Under secured lines, the inability of payment means that lenders have the right to take ownership of the collateral provided. It can also hurt your credit score, and the chance to borrow money again can become hard. For unsecured lines, banks can deny your application to loan due to bad credit history and poor credit scores. Also, businesses and individuals can become subject to changing interest rates and penalties and lawsuits for unpaid dues.
The points above show that secured and unsecured line of credit varies. Although both are financial instruments that individuals and business can use, there are significant distinctions and accompanying risks you should consider before availing.
What’s the difference between unsecured and secured personal lines of credit? Knowing the difference can help you manage your financial risks better. Check out our tips at www.personallineof.credit.