What is the difference between secured and unsecured loans?
Are you considering taking a loan? It’s important to know exactly what type of loan is best for you to take. Secured loans and unsecured loans in Singapore are two different types of loans you might come across – both at banks and licensed money lenders.
Here, we share with you what they are, how they work and what are the differences, to help you decide which one is more suitable for you.
Secured loans are loans that require your assets (such as jewelry, home, vehicles that you own, etc) to be pegged as collateral to the loan. Sometimes, it can also be a fixed deposit of money.
Taking out a secured loan means that if you default on any of your payments, your loan provider would be able to seize the loan collateral (your asset) and sell it in order to recoup any losses they might have made.
Some examples of a secured loan include a home loan, for which you might peg your new home as a collateral to the loan. In fact, even the age-old practice of depositing your jewelry at a pawn shop as security for the money they lend you, is considered to be a secured loan.
Typically, secured loans are used for specific purchases that might require you to pay a large sum of money, such as a new car.
Unsecured loans can be taken with fewer restrictions as compared to secured loans. For unsecured personal loans, you can take it for any reason, such as for weddings or medical emergencies, etc. Unsecured loans don’t require collateral but might come with higher interest.
This is because while the lack of collateral reduces your risk when taking the loan, it increases the risk for the lender, in case you default on the loan. If you don’t repay your loan on time, it can affect your credit score and borrowing history with lenders and make it difficult for you to get future loan applications approved.
Unsecured loans also have caps on the maximum amount of money that you can borrow.
With banks, depending on your current income (varies across different banks), you can take a loan of up to 12 times your monthly income. If you are a foreigner, it can be tough for you to get an unsecured personal loan if you are earning less than $3,000 a month.
With licensed money lenders, if you earn less than $10,000 annually, the maximum amount of money you can borrow as a Singaporean is $3,000. With that said, if your annual income is at least $20,000, you can take unsecured loans of up to 6 times your monthly income. The conditions are stricter for foreigners – you can read more in MinLaw’s guidelines here.
When you take up a secured loan, you get to pay lower interest rates and reap greater savings.
Another benefit of taking a secured loan is that you can loan any amount of money, for a longer loan tenure so you can spread your payment out over a longer duration – this means your repayment sum every month might be more manageable than a loan with shorter tenure.
However, if you miss payments, you will have to surrender your collateral. For example, if you were to use your house as a collateral and if you defaulted on the loan payment, you may lose the house.
So before taking any secured loans, do make sure that you have done your financial planning well so you can make the adequate repayments.
Unsecured loans with banks generally involve lower loan amounts, which means they would usually be approved more quickly as compared to secured loans.
With licensed money lenders, the approval process of unsecured loans is even faster as compared to banks – you can even get your loan approved in a day!
Credit checks run by licensed money lenders are also less stringent, and you’ll be able to get an unsecured loan even if you have a bad credit score.
There are also many types of unsecured loans, such as payday loans, medical loans, debt consolidation loans and so on, and you can use your personal loans for anything. The reason for your loan may not affect your loan approval, though you may have to declare it.
This flexibility doesn’t come without drawbacks. Expect higher interest rates on unsecured loans, with money lenders being allowed to charge between 1-4% interest per month.
If you don’t repay your loan on time, late interest fees can go up to 4% a month for each month the loan is repaid late. Added up, this can become a relatively hefty sum to bear. To get a better idea, you can take a look at how lenders calculate your interest rates.
After considering the pros and cons of both and assessing which might be more suited to your financial situation, you should ask yourself the following questions.
If you are taking a loan for a big purchase, such as a home loan or a car loan, you will have to take a secured loan. But if you’re taking a personal loan, you have the option of taking either a secured or an unsecured loan.
Although it is generally more affordable to take a bank loan, your loan approval highly depends on your credit score. If you have a poor credit score, it is highly unlikely that banks (most of which have stringent requirements) will approve your loan request.
So if you don’t have a good credit history, the easiest and fastest option for you might be to opt for unsecured loans from licensed moneylenders.
If you find yourself needing instant cash, unsecured loans from licensed money lenders are almost definitely a better option because of their faster approval process. You can get a fast cash loan within the same day!
If you have decided that unsecured loans might be the best option for you, it’s time to shop around and compare unsecured loans from different money lenders, so you can get a personal loan with lowest interest rates and loan terms that work best for you..
At CompareSIng, this is what we can do for you.