Final answer:
Secured loans require collateral, such as property, that a bank can claim if the loan is not repaid, while unsecured loans do not. On a personal balance sheet, deposits are assets and loans are liabilities, whereas for banks, the opposite is true. The size and familiarity of a firm can influence whether it chooses bank borrowing or bond issuance as a financial strategy.
Step-by-step explanation:
The difference between a personal loan as secured debt and unsecured debt primarily revolves around the presence or absence of collateral. A secured loan requires the borrower to provide an asset as collateral, which the bank can seize if the loan is not repaid.
Examples of collateral include property, vehicles, or equipment. Meanwhile, unsecured loans do not require collateral. These loans are often based on the borrower’s creditworthiness, and if not repaid, the lender has fewer immediate remedies and often has to take legal action to recover the funds.
On a personal balance sheet, bank deposits are typically listed as assets because they represent the money you have saved that can readily be used or invested. Loans you have taken out are recorded as liabilities since they indicate the amount of money you owe. In contrast, from the bank’s perspective, loans are considered assets because they represent funds the bank will receive over time, while deposits are liabilities as the bank owes this money to its depositors.
In terms of financial strategies, smaller firms often find bank borrowing more practical due to the customization and relationship with the bank, while larger, well-known firms might prefer issuing bonds to raise capital. However, this is not a strict rule, and various scenarios might lead to different financial approaches based on the size and needs of the firm or individual.