n help you acquire the amount of credit you need to grow your business’s operations. You will be able to withdraw as much money as you need up to the credit limit and only pay interest on the amount you borrow.
A secured line of credit is tied to an asset or property. One common secured line of credit is a mortgage, which is tied to a house or other type of real estate. If the borrower defaults, the lender would repossess the property.
There are benefits to a secured line of credit but there are also some drawbacks. In this post, we will examine the pros and cons of secured line of credit so you can determine if it is the right option for you.
What Are the Pros of a Secured Line of Credit?
Secured lines of credit have low interest rates
Perhaps the most important benefit is that they have low interest rates. Lenders calculate risks when setting interest rates, the higher the risks, the higher the interest rate.
Since a secured line of credit is backed by an asset, risks are lowered for the lender. The lender will sell the repossessed asset to cover their losses if you default on your credit line. Due to lower risks, lenders can offer more affordable interest rates.
Lower Credit Scores Are Okay
Business owners with poor credit run into challenges when applying for financing. There are lower risks associated with secured lines of credit so lenders will be less concerned with your credit score. In fact, one of the main reasons lenders pay so much attention to your credit history is because it indicates your likeliness to repay a loan.
With a secured loan, your collateral risk lowers and increases the likelihood that you will make your payments. Since you will not want to lose the asset tied to your secured line of credit, you will do your best to repay the loan.
Your credit scores will impact your loan terms. Lower credit scores indicate higher risk to lenders so you might have to pay higher interest rates. Interest rates for secured lines of credit are lower than unsecured lines of credit.
You Could Get Longer Loan Repayments
Lower risk not only reduces interest rates, but lenders might also offer longer loan repayment terms. This is because the collateral you offer will help you secure a line of credit. In some cases, lenders will offer repayment periods up to ten years.
What Are the Cons of a Secured Line of Credit?
You Need Valuable Collateral
The benefits that we mentioned above will help you secure your loan. However, the collateral you need has to be valuable. This means a home or other piece of property, such as equipment, significant inventory, or invoices. If you lack valuable assets like the ones mentioned, you will struggle to secure the line of credit.
You Can Lose Your Assets
You will lose your assets that are tied to you loan if you default. You have agreed to the terms and offered the asset as collateral, you will have little to no legal recourse.
It is important to note that you will need to be careful whenever you use collateral to secure a line of credit. Whenever possible, it is best to use collateral that you can operate your business without.
Securing your loan with business property and facilities might be better than using your personal home.
Beware of Variable Interest Rates
Secured line of credit feature lower interest rates, but they are usually variable rates. This means rates can rise, which can become more burdensome. Make sure that you understand the terms of your secured line of credit before signing anything.
The Bottom Line
There are both benefits and drawbacks of secured lines of credit. A secured line of credit would be a good option to consider if you are interest in business financing because you will have access to capital you can draw upon.