You may be thinking of getting credit through vehicles like credit cards to cater to your financial needs. But do you know what your debt options in Singapore are? If not, start with the basics before you use those credit cards or get into some other kind of debt.
What Is An Unsecured Loan And How Does It Work?
An unsecured loan is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Unsecured loans—sometimes referred to as signature loans or personal loans—are approved without the use of the property or other assets as collateral.
On the other hand, a secured loan is a loan that is issued after you offer security, which is any valuable asset that a money lender accepts.
Key Differences between Secured and Unsecured Loans
The difference between unsecured and secured loans is that collateral is required for the latter. To understand better the unsecured and secured loan, take a look at other factors, such as loan amount and interest rate.
Understanding unsecured loans
Here are several things that you should know:
Loanable amount is the principal that credit facilities can give you. The amount is lower if the loan is unsecured since lenders risk more.They can’t recover their monies if you don’t repay the debt.
Your trustworthiness determines the principal you can access. And it depends on your credit history and income. So, your credit score matters.
However, the Monetary Authority of Singapore (MAS) has set the maximum credit limit for borrowers at 12 times one’s monthly income.
Interest rate refers to the interest amount due within a set period relative to the amount you have borrowed. Unsecured credit comes with higher interest because lenders take higher risks when they provide loans.
Understanding secured loans
Here are the things that you should know about a secured loan:
1. Loanable amount
If you provide assets as security, the loanable amount will be higher and can be offered for a longer loan term. The more valuable the assets you offer, the higher the principal.
Lenders are more comfortable giving you more credit. That’s because if you fail to repay your debt, they will sell off your assets, and recover the balance.
Examples of secured loans include secured credit cards, home loans, car loans, secured bank loans, and home equity loans.
2. Interest rate
Secured loans charge lower interest. That’s because lenders don’t risk anything since you offer them security.
Below is a comparison table showing the differences between unsecured and secured loans:
|Secured Loans||Unsecured Loans|
|Interest||Lower interest due to lower risk associated with defaulting||Higher interest rates due to the higher risk associated with defaulting|
|Loanable Amount||More credit due to lower risk associated with lending. And the loans have longer loan tenures.||Lower credit due to the higher risk associated with lending. And the loans have shorter loan tenures.|
Which Should You Get?
Learn the pros and cons of either type of loan before deciding which one to get.
- It doesn’t require any security. So, if you delay making debt repayments or default, you will not be risking your assets.
- If your income is high, your debt ceiling will also be high. You won’t be limited by the value of an asset which may not be as valuable. That’s why the wealthy have a credit card with unlimited credit.
- If your income is low, the unsecured credit will be lower than you may need.
- The interest rates are high thus making your debts more expensive in the end.
- It has lower interest rates with lengthier loan terms. As a result, it ends up being less expensive to borrow.
- It provides access to more credit. You just need to offer sizable assets as collateral.
- The risk to your assets is great. If you default on a bank loan, the lender will sell them to recover the balance.
- If your assets have little value, your credit will be lower than you anticipated.
Below is a comparison table showing the pros and cons of unsecured vs. secured loans
|Secured Loans||Unsecured Loans|
|Pros||Your loan can be much higher than the standard limit if you have assets of considerable value.The interest is much lower thus making the loan much cheaper.||You will not risk any valuable assets if you delay making payments or default.You are not limited by the value of your assets especially if they have low value. Rather, your income is what will be considered.|
|Cons||You risk losing your assets if you don’t keep up with paymentsThe debt you can leverage to meet your financial needs may be lower than anticipated if the value of your assets is low.||Usually, the overall credit you have access to is much lower.The interest associated with the credit you are given is much higher due to the additional risk lenders are taking|
Whether you choose secured or unsecured loans depends on your financial health, the kind of credit you need (do you need a business or personal loan?), and your risk tolerance concerning the valuable assets that you own.
Singapore lenders are likely to check your credit history. Get a CBS report from Credit Bureau Singapore to learn about your creditworthiness.
Do you have any further questions concerning secured or unsecured credit? Are you interested in getting credit or more information about the process of loan applications? Reach out to us at Bugis Credit. We are a licensed moneylender and have been in business since 2007. We have a 5-star rating on Google to prove our reliability.