Unsecured loans, credit lines and signature loans have distinct advantages and disadvantages, depending on your borrowing situation. Unsecured loans and signature loans don't require you to put up property as collateral, but your relationship with your lender affects your ability to use signature loans. Credit lines offer more flexible access to funds and you can sometimes get a secured or unsecured line. Examine your business needs and risks to make an informed choice.
An unsecured loan means you get financing without putting up your home, car or other property as collateral. For new homeowners, securing another loan on top of a mortgage with your home is risky. Often called personal loans, unsecured loans are typically granted based on your income, credit rating and existing debt. If you have good income and a strong credit rating, you may get a good interest rate. If your financial picture is a bit murky, lenders may charge you a high interest rate to offset the risks.
Credit lines are different from loans in that you're granted access to funds up to a certain limit. This works better if you need flexible access rather than a set loan amount. Open credit lines sometimes offer an inducement to borrow more than you need. Credit lines are either secured by your home or business or are unsecured, such as credit cards. Similar to loans, your borrowing rates are better, but you have more risk because of the potential loss of your property as the security for the credit extended. Some credit lines initially have interest-only monthly payments. You might want to pay extra toward the principal each month to avoid delaying the repayment and increasing your total interest paid over time.
Signature loans are also referred to as good faith or character loans. For this simplest type of unsecured loan, you need only provide a signature on the loan document to get funds. These loans are typically used in small towns where individuals and business owners have closer relationships with banks. A good community reputation and the good borrowing position needed for any unsecured loan are common requirements. In essence, this is a simple, efficient unsecured loan. The signature loan is a good option if you have a good community reputation and need quick access to a personal loan.
As indicated, your best source of debt depends on your situation or spending habits. Of course, no debt is generally preferable unless you put it to good use, like with a home improvement, college or business investment. If you need a fixed loan amount and your credit earns you a reasonable interest rate, an unsecured loan or signature loan makes sense. If you need more flexible borrowing, a credit line works. With a credit line, compare the difference in interest rates for secured and unsecured options. If the difference is significant and you can tolerate the risk of property loss, a secured line may be your best option to minimize the cost of borrowing.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.