Loans come in handy to those who need a quick influx of cash. Yet, as easy as it may sound, there are much more things to know before considering one. Among such are choosing between a secured or an unsecured loan and understanding the primary and inherent concepts involved.
The primary difference between secured and unsecured loans lies in the collateral involved. Secured loans are always backed by collateral, such as a home or a vehicle. Unsecured loans are not tied to such assets. And while both options can play ideal roles in your financial life, the choice will ultimately depend on your current situation.
Whether considering a secured or an unsecured loan, it is always an edge to familiarize yourself with the necessary details. Read through and understand all strings attached to both options.
Comparison: At a Glance
|
Secured Loans |
Unsecured Loans |
|
|
Collateral |
✓ (Assets such as: home properties, vehicles, certificates of deposit) |
X |
|
Interests |
Lower | Higher |
|
Repayment Period |
More extended (ranges between 5 to 30 years) | Shorter (ranges between one month to 2 years) |
| Loan Amount | Higher |
Lower |
| Risks |
|
|
What are Secured Loans?
A secured loan requires collateral such as a home, vehicle, insurance policy, or other valuable assets. These loans are readily available from banks, credit unions, and other financial institutions in Singapore.
Generally, secured loans tend to have lower risks as they protect the financial institutions’ interest. Thus, it is easier for financial institutions to approve secured loans as they can put a lien on the collateral or seize your asset in case of a default. However, it is much riskier for the borrower because you can lose your hard-earned property if you don’t keep up with your repayments.
A secured loan can be an excellent option if you need to borrow a large sum. It may also come with lower interest rates due to the lower risks it presents to financial institutions. Typical examples of these are home loans and vehicle or auto loans.
Types of Secured Loans
There are many types of secured loans, and common types in Singapore include:
1. Mortgage Loans
This type involves borrowing money from financial institutions to finance a home property. The property is mortgaged to secure the loan, and you must repay the loan in monthly installments over several years.
Common examples of mortgage loans in Singapore are HDB loans and home loans. Those who intend to buy an HDB flat may take out an HDB loan. Otherwise, for private properties, borrowers may take a home loan from banks.
2. Car Loans
A car loan or auto loan allows you to borrow money strictly to purchase a vehicle for personal use. The vehicle you intend to purchase will serve as collateral for the loan.
Like a mortgage loan, this loan type is paid off in fixed installments over a specific tenure. The financial institutions will only transfer ownership of the vehicle upon completion of payments.
3. Home Equity Loans
Home equity loans, including home equity lines of credit (HELOCs), are types wherein you borrow against your existing home’s equity. You can get the needed funds without selling your property with these types.
With a HELOC, you can access a revolving line of credit during the draw period. Meanwhile, with a home equity loan, you can borrow up to 75% of the property market value, less any outstanding mortgage.
4. Secured Credit Cards
Secured credit cards are typically for those who do not have good credit scores or credit history. Banks will require a fixed deposit of at least S$10,000, which they will use to offset balances in case the borrower cannot pay the credit due.
5. Secured Personal Loans
Some banks and credit unions in Singapore may also offer secured personal loans. You may consider a secured personal loan if you don’t have good credit records. These loans are backed against a savings account or a certificate of deposit.
Secured Loans: Advantages and Disadvantages
Secured loans present many advantages in terms of repayment, interest rates, and loan amount. However, it also offers disadvantages regarding the risks and limitations involved.
Advantages
- Has a more extended repayment period
Borrowers can repay home and mortgage loans between 20 and 30 years and other types between 5 and 15 years. A longer repayment period also means lower monthly repayment and lower chances of borrowers defaulting.
- It comes with lower interest rates.
As secured loans pose a lower risk to financial institutions, borrowers may enjoy lower interest rates.
- You can get higher borrowing limits.
Secured loans allow you to borrow more considerable sums based on the value of the collateral.
Disadvantages
- Secured loans pose a higher risk for the borrower.
There is the considerable potential of losing your home, car, or savings in case you miss out on payments.
- The use of funds is limited to their intended purpose.
The funds will not be available for expenses or needs other than the intended purpose.
What are Unsecured Loans?
Unsecured loans do not require any collateral from the borrower. Due to this high-risk nature, financial institutions, especially banks, often prefer borrowers with a steady source of income and good credit scores. Thus, these loans may also come with stricter requirements, lower sums, and higher interests.
Types of Unsecured Loans
The following are the types of unsecured loans you can avail of from financial institutions:
1. Personal Loans
The most popular unsecured loan option in Singapore. They are flexible and ideal for all types of expenses.
2. Business Loans
This loan type is available to most SMEs and helps finance additional working capital or inventory. You can get these loans from banks.
3. Credit Card
Another type is unsecured debts, such as those taken against your credit card account. You can get funds for as long as your account is in good credit standing and has available credit.
Unsecured Loans: Advantages and Disadvantages
Like secured loans, unsecured types have pros and cons.
Advantages
- You can get funds even with no collateral.
You can still get funds from financial institutions even if you have no property to put up against the loan. Which means, there is zero risk of losing an asset and your hard-earned property will not be at stake in case of a default. However, financial institutions can sue you or take your case to a collection agency if you miss your payments.
- Unsecured loans are easy to obtain.
You can easily obtain an unsecured loan from banks and other financial institutions if you have a good credit score and stable income.
- There are fewer restrictions on the use of funds.
With an unsecured personal loan you can use the funds for whatever purpose they may deem fit.
Disadvantages
- Interests may snowball if not paid on time.
Unsecured loans have higher interests than secured loans.
- Secured and Unsecured Loans: Which One Should You Choose?
When taking out a loan, consider your reasons and your current financial situation carefully.
Arguably, secured loans offer a greater risk to the borrower because their collateral is at stake. A secured loan is excellent if you need a large sum of money. Relevant purposes include:
- Debt consolidation
- Home improvements
- Essential large purchases such as buying a home or a vehicle
However, you must ensure that you are financially ready to keep up with the repayments. Else, you risk losing your valued property.
On the other hand, unsecured loans are ideal for smaller purchases or needs. They are also easier to repay and won’t put your property at risk.
Whatever loan option you choose, always be a responsible borrower. Make sure to repay your loans diligently to improve your score and get better interest rates in the future.
Closing
Living in an expensive country like Singapore, many rely on credit to pay for expenses – big or small. Still, borrowing money always comes with risks and whether you are taking out a secured or unsecured loan, always carefully consider the pros and cons. Most importantly, borrow within your means and always have a clear pay-off plan.
Key Takeaways
- Secured loans are best for significant expenses such as home renovations or a car purchase.
- Unsecured loans are ideal for urgent short-term needs such as bills or minor home repairs.
