To address the financial strain on Singaporeans due to rising costs, the government is increasing its support with an additional S$600 in CDC vouchers for each household and up to S$400 in cash handouts for eligible adults, as Deputy Prime Minister and Finance Minister Lawrence Wong announced.
Despite these measures, many Singaporeans still seek additional financial support through secured and unsecured loans. Understanding the difference between the two loans is vital for making informed decisions that align with your financial goals.
This guide aims to help you navigate these options, whether for funding new projects or covering unforeseen expenses.
Comparing Secured and Unsecured Loans
At a Glance
| Feature | Secured Loans | Unsecured Loans |
|---|---|---|
| Collateral | Required | Not required |
| Interest Rates | Lower, due to collateral (e.g., 2.9% for home loans, 2.28% for car loans) | Higher, due to lack of collateral 3.88% per annum for banks personal loans Up to 4% monthly for moneylenders) |
| Loan Amounts | Up to 75% of property’s value for private lenders, 55% to 90% for HDB loans (home loans); Up to 70% of the car’s price if OMV ≤ S$20,000, otherwise 60% (car loans) | Up to 4 to 10 times monthly salary for bank Up to 6X for licensed moneylenders |
| Repayment Terms | Up to 30 years for home loans; 1 to 7 years for car loans | Generally 1-5 years for bank From 6 to 12 months for licensed money lender |
| Minimum Income Required | Typically need a minimum annual income of S$20,000 | Typically need a minimum monthly income of S$2,000 |
| Credit Score | A good credit score may be required, although some secured personal loans are available to those with lower scores. | A good credit score is required for banks Credit score is not required for licensed moneylenders |
Key insight: Secured loans offer financial leverage with lower costs at the risk of losing assets, while unsecured loans provide quicker, collateral-free access to funds at higher costs. The choice between the two should align with your financial goals, ability to repay, and risk appetite.
Secured Loans are generally more suitable if you:
- Have valuable assets to use as collateral and are willing to risk them.
- Need to borrow a larger amount of money.
- Prefer lower interest rates and longer repayment terms.
- Have a specific purpose for the loan, such as buying a home or car.
Unsecured Loans might be better for you if you:
- Lack assets to use as collateral or prefer not to risk them.
- Need a loan quickly without the delays of collateral evaluation.
- Require funds for general use or expenses without tying the loan to a specific asset.
- Have a good credit score and stable income to meet the stricter eligibility criteria.
Let’s delve deeper into the specifics of secured and unsecured loans below to provide a clearer understanding.
What Are Secured Loans?
Secured loans are a type of borrowing where the borrower pledges an asset as collateral to the lender. Investopedia notes that for substantial loans, especially those used to finance specific assets, or when an individual’s credit score does not meet the criteria for an unsecured loan, lenders may require collateral.
This collateral acts as a security for the loan, reducing the risk for the lender and often leading to more favorable terms for the borrower. However, it’s important to note that some secured loans, like those aimed at individuals with poor credit or short-term installment loans, may still come with higher interest rates due to their increased risk.
Pros
- Lower Interest Rates: The presence of collateral reduces the lender’s risk, often resulting in lower interest rates compared to unsecured loans.
- Higher Loan Amounts: Lenders are generally more willing to offer larger loan amounts when there’s security involved.
- Longer Repayment Terms: Secured loans can come with extended repayment periods, making monthly payments more manageable.
- Guaranteed approval: With an asset being put as collateral, lenders will see no risk of approving your application for secured loans
Cons
- Risk of Losing Collateral: If you fail to repay the loan, the lender has the right to seize the collateral, which could be a significant loss.
- Longer Application Process: The process of valuing and verifying the collateral can make the application process longer compared to unsecured loans.
- Loan Amount Depends on The Value of Your Assets: The asset you put for collateral will surely need to be of high value to the lender for it to be deemed less risky. Thus, your loanable amount will be influenced by the value of your asset.
Examples of Collateral
These collateral types are crucial for securing a loan, as they provide lenders with a form of protection if the borrower defaults on the loan payments.
1. New or Used Vehicles
- Valuation: Based on the Open Market Value (OMV). Newer vehicles generally receive a higher valuation.
- Loanable Amount: Lenders typically finance up to 60%-70% of the vehicle’s OMV.
2. Real Estate
- Valuation: Appraised based on market conditions, location, property type, and condition.
- Loanable Amount: The loan amount can be up to a certain percentage of the property’s appraised value, usually subject to a Loan to Value (LTV) ratio.
3. High-Value Assets (e.g., art, jewelry, collectibles)
- Valuation: Assessed based on authenticity, market demand, condition, and rarity.
- Loanable Amount: Generally, a lower LTV ratio is applied due to the potential difficulty in selling the collateral in case of default.
4. Term Deposits
- Valuation: The amount deposited plus the interest it accrues over the term.
- Loanable Amount: Considered low-risk for lenders, allowing borrowers to secure an amount close to the deposit value.
5. Equity in Home
- Valuation: The current market value of the property minus any outstanding mortgage balance.
- Loanable Amount: Borrowers can often take out loans at a percentage of the equity value.
Note: The specific loanable amount and terms can vary based on the lender’s policies, the borrower’s creditworthiness, and other factors. Always consult with the lending institution for the most accurate and tailored information regarding loanable amounts and collateral requirements.
Features of Secured Loans
For discussion purposes, let’s focus on the two most common secured loans – home loans and car loans.
| Type of Secured Loan | Loanable Amount | Interest Rate | Loan Term |
|---|---|---|---|
| Home Loans | Up to 75% of the property’s value for private lenders, 55% to 90% for HDB loans | 2.9% for both private properties and HDB flats | Up to 30 years, varies by borrower’s age and financial situation |
| Car Loans | Up to 70% of the car’s price if OMV ≤ S$20,000, otherwise 60% | As low as 2.28%, varies by loan amount and borrower’s creditworthiness | 1 to 7 years, monthly repayments, early repayment options available |
Loan Amount
The amount you can borrow with a secured loan varies depending on the type of loan and the value of the collateral. Typically, you can apply for up to S$200,000 with terms of up to seven years. For ongoing lines of credit, the amount can differ.
Home Loans: The loan amount is influenced by factors such as the borrower’s age, loan duration, and property type. Assessment is based on:
- Mortgage Servicing Ratio (MSR): Limits the loan amount to 30% of your monthly income. For example, with a monthly salary of S$5,000, the maximum loanable amount is S$1,500 per month.
- Total Debt Servicing Ratio (TDSR): Caps your monthly mortgage repayment at 60% of your monthly income.
- Loan-to-Value (LTV) Limits: Determines the maximum loan amount based on the property’s value. For private lenders, you can borrow up to 75% of the property’s value or selling price, whichever is lower. For HDB loans, the range is between 55% to 90%.
Car Loans: The loan amount depends on the vehicle’s Open Market Value (OMV). If the OMV is S$20,000 or lower, you can borrow up to 70% of the car’s price. If the OMV is above S$20,000, the loanable amount is limited to 60% of the vehicle’s price.
Interest Rate
Secured loans typically offer lower interest rates due to the reduced risk for the lender, thanks to the collateral provided by the borrower. The lower rates make secured loans a more attractive option for borrowers looking to minimize their borrowing costs.
Home Loans
In Singapore, as of February 27th, 2024, the prevailing interest rates for a 30-year fixed home loan are as follows:
- Private Properties: The interest rate stands at 2.9%.
- HDB Flats: The interest rate is also at 2.9%.
These rates are based on the latest price checkpoints provided by Roshi, an online platform that offers a real-time loan marketplace for Singapore.
Car Loans
For car loans in Singapore, as of February 27th, 2024, the lowest interest rate available is 2.28%. This rate applies to loans taken out for the purchase of vehicles, with the specific rate depending on factors such as the loan amount, repayment period, and the borrower’s creditworthiness.
Loan Terms
Home Loans
- Typical Duration: Home loans in Singapore usually have a loan term of up to 30 years. The exact term can vary based on the borrower’s age, financial situation, and the loan type.
- Repayment Schedule: Borrowers can choose between fixed or floating rate packages, with the option to make monthly or bi-weekly payments.
Car Loans
- Typical Duration: Car loans in Singapore generally have a shorter term compared to home loans, ranging from 1 to 7 years.
- Repayment Schedule: Payments are typically made monthly, with the option to make early repayments without penalty in some cases.
What Are Unsecured Loans?
Unsecured loans are a type of borrowing that does not require any collateral from the borrower. This means that the lender relies solely on the borrower’s creditworthiness and financial stability to approve the loan. Unsecured loans are often considered riskier for lenders, which can lead to higher interest rates for borrowers.
Pros
- Lenient expenditure: Unsecured loans are not tied to a specific type of expense and require no proof of your expenditure
- Quicker Approval Times: Unsecured loans often have a faster approval process since there’s no need to evaluate collateral.
- No Collateral Required: Borrowers do not need to provide any assets as security, making unsecured loans more accessible to those without significant assets.
Cons
- Higher Interest Rates: The lack of collateral means higher risk for the lender, which is often offset by charging higher interest rates.
- Stricter Eligibility Criteria: For unsecured loans, which are riskier, lenders often ask for a higher credit score and look more closely at your finances. However, licensed moneylenders usually don’t need as high of a credit score and approve loan faster than banks.
Common Types of Unsecured Loans in Singapore
- Bank Personal Loans: These flexible loans are suitable for a wide range of uses, including debt consolidation, vacation financing, or managing unforeseen costs.
- Licensed Moneylender Personal Loans: Similar to bank loans, these adaptable loans offer financial support for numerous needs, from paying off debts to financing holidays or handling emergency expenses.
- Credit Cards: Credit cards offer a revolving line of credit, allowing you to borrow up to a certain limit and repay at your own pace, with minimum monthly payments.
- Balance Transfer: Allows you to consolidate debt from several credit cards into one, often with lower interest rates.
- Debt Consolidation Plan: A strategic option for managing multiple debts, this plan consolidates various loans and credit card balances into a single loan with potentially lower interest rates and simplified monthly payments, making it easier to manage finances and reduce overall interest costs.
Features
| Type of Unsecured Loans | Loanable Amount | Interest Rate | Repayment Period | Other Fees |
|---|---|---|---|---|
| Unsecured Personal Loans from Banks | Up to 4 times or up to 10 times if the annual salary exceeds $120,000 | From 3.88% per annum | Longer loan tenure compared to other types of unsecured loans. Generally from 1-5 years | Around 1-4% |
| Unsecured Loans From Licensed Moneylenders | Up to 6 times of your monthly salary | 1- 4% monthly | Generally 6-12 months subject to minimum monthly payments | A fee not exceeding $60 for each month of late repayment; a fee not exceeding 10% of the principal of the loan when a loan is granted |
| Line of Credit | Up to 4 times or up to 10 times if the annual salary exceeds $120,000 | Around 20.5% per annum | Revolving credit. You may borrow again up to your credit limit. | N.A. |
| Balance Transfer | Depends on creditworthiness | From 5% per annum | Generally 6-12 months subject to minimum monthly payments | Around 4-7% |
| Debt Consolidation Plan | Depends on the financial institution | Around 3.48% per annum | Generally from 3-10 years | Depends on the bank or financial institution |
Loan Amount: Borrowing limits are based on income and creditworthiness. For banks, you could borrow up to 10 times your annual salary, while licensed moneylenders offer up to 6 times your monthly salary.
Interest Rate: Interest rates depend on the lender and your credit score. Banks start from 3.88% p.a., whereas licensed moneylenders in Singapore have rates from 1-4% monthly.
Loan Tenure: Repayment periods vary by loan type and lender. Banks offer personal loan tenures from 1 to 5 years, while moneylenders have shorter terms, usually 6-12 months.
Repayment Schedule: Loans are typically repaid monthly, with either fixed or variable rates, allowing for predictable financial planning.
How to Apply for Secured and Unsecured Loans
Note: Document requirements may vary per bank or financial institution. It is best to check with the financial institution of your choice before submitting your loan application.
Secured
Typical documents required:
- Collateral valuation report
- Proof of ownership of the collateral
- Proof of income (e.g., salary slips, tax returns)
- Identification documents (e.g., NRIC or passport)
Steps to apply:
1. Choose the Loan Type: Decide on the type of secured loan you need, such as a home loan or car loan.
2. Assess Your Collateral: Ensure you have a valuable asset to offer as collateral.
3. Check Eligibility Criteria: Review the lender’s requirements, including credit score, income, and LTV ratio.
4. Gather Documentation: Prepare necessary documents, such as proof of income, asset valuation, and identification.
5. Submit Application: Complete the loan application form and submit it along with the required documents.
6. Await Approval: The bank will assess your application, which may include a valuation of the collateral.
Unsecured
Typical documents required:
- Proof of income (e.g., salary slips, tax returns)
- Employment verification (e.g., employment letter)
- Identification documents (e.g., NRIC or passport)
- Credit score report (mostly required by banks; legal lenders are more lenient)
Steps to apply:
1. Choose the Loan Type: Select the type of unsecured loan you need, like a personal loan or credit card.
2. Check Eligibility Criteria: Review the lender’s requirements, focusing on your credit score and income.
3. Gather Documentation: Prepare necessary documents, such as proof of income, employment verification, and identification.
4. Submit Application: Complete the loan application form and submit it along with the required documents.
5. Await Approval: The lender will assess your creditworthiness and financial stability.
Tips for a Smooth Application Process
Getting your loan application approved is not an easy thing. Lenders look at several criteria to verify your qualifications. To get you prepared for a successful loan application, here are some tips you may use:
- Make a checklist of the eligibility and requirements: Financial institutions require different criteria and documents. Make sure to bring all the necessary papers as failure to do so may cause application rejection.
- Check your credit score: Whether you take out a secured or unsecured loan, once you default on your loan, lenders will report this to financial authorities especially the Credit Bureau Singapore (CBS). This will take a bad turn when you want to take out another loan in the future. Lenders will surely go through your CBS. Thus, when they discover your poor credit history, your application for a loan will most likely be rejected.
- Prioritize your existing debts: With little debt, you can prove to the lender that you afford to get a secured or unsecured loan in Singapore and there is little chanc that you will fail to repay them.
- Don’t apply for too many loans: A lender in Singapore can find out how often you have applied for a secured or unsecured loan which can become an issue if your applications have been rejected multiple times. This will make Singapore lenders skeptical to offer you a loan since you will be deemed desperate and unable to repay them.
Conclusion
Whether you’re considering a secured loan in Singapore for a large purchase or need an unsecured loan for immediate financial relief, making an informed decision is crucial.
Here are three key takeaways to guide you:
- Secured loans offer lower interest rates and higher borrowing amounts but come with the risk of losing your collateral. Evaluate whether the need justifies the risk involved.
- Unsecured loans might be more accessible if you lack significant assets or prefer not to risk them. However, they require a stable income, reflecting the need for financial stability.
- Regardless of the loan type you choose, consider your long-term financial health. Opt for a loan that not only meets your current needs but also aligns with your ability to repay over time, without compromising your financial goals.
Ready to get the financial support you need with a trusted licensed money lender in Singapore? Visit A1 Credit to explore a range of unsecured loan options tailored to your financial situation. With a stellar 4.9-star rating from Google reviews, A1 Credit offers transparent terms, competitive interest rates, and a hassle-free application process. Request a free quote today!
