Collateralized vs. Non-Collateralized Loans: What’s the Difference?

With so many kinds of loans out there, it can be hard to know which ones you’re best qualified for, let alone which require collateral and which don’t. However, it’s extremely important to understand collateralization if you’re serious about securing financing for your business.

Collateralization is simply the use of an asset as collateral when securing a loan. If a borrower is unable to pay back the loan according to the initial agreement, the lender can seize the asset and sell it to offset their loss. However, there’s a little bit more to the differences between collateralized loans and non-collateralized loans than that. 

How do collateralized & non-collateralized loans work?

Collateralized Loans

Qualification: Because collateralized loans provide lenders with more security, they’re easier to qualify for than non-collateralized loans. To qualify, a lender will consider your credit score, history, income, debts, and consider the value of the asset(s) you’re offering as collateral. The more valuable an asset a borrower offers as collateral, the more confident a lender is that they can pay back the loan.

Rates: Collateralized loans often have significantly lower annual percentage rates than non-collateralized loans. The rate is determined by the same factors as the qualification criteria, so the more valuable your collateral is, the better rate you’d get.

Repayments: Collateralized loans are typically repaid in fixed monthly installments over the course of a few years. These payment amounts can vary by lender.

Risk: Should you default on a loan, your credit score will suffer, and the collateral can be seized by the lender.

Uses: You can use a collateralized loan for almost anything, from small home improvement projects to debt consolidation.  

Non-Collateralized Unsecured Loans

Qualification: To qualify for a non-collateralized loan, you need to have excellent credit. In addition to your credit score and history, lenders will review your income and debt-to-income ratio to see if you qualify.

Rates: Non-collateralized loans have fixed rates that range from 6% to 36%, with the lowest rates going to the most qualified borrowers.

Repayments: Like collateralized loans, non-collateralized loans are paid back in fixed monthly installments over the course of a few to several years.

Risk: Since there is no collateral, non-collateralized loans have more risk for the lender, but less risk for the borrower. They’re a safer choice for many borrowers because their credit score is the only thing affected if they fail to repay the loan according to the initial agreement.

Uses: Non-collateralized loans can be used for just about anything.

Looking for a business loan without collateral? Assuming you have a great credit score, verifiable current income, and low debt-to-income ratio, you can qualify easier than you think. Unsecured Funding Source can help you secure the funds you need. Apply here today, and you’ll receive a response in just a few hours!