Loans generally fall under two main categories–secured and unsecured loans. The key difference between the two is the collateral, which is pledged as security for repayment of a loan, to be forfeited in the event of a default.
To understand better which is best for your situation, take a look at our pros and cons and other considerations.
A secured loan is a line of credit that is guaranteed against an asset you own or buy with the loan.
The security can come in the form of a number of different items, including a car, equity in your home, high-priced items such as jewelry or monetary accounts such as term deposits.
Secured loan refers to the type of loans which requires you to put on collateral before the loan is issued. This is to guarantee profit to the lender just in case if you default on the loans. The secured asset can be anything that you are getting the loan for or something that you already own ranging from cars, property, gold, term deposits, etc.
1. Loanable amount
The approved amount you can get differ from each type of loan. You can usually apply for an amount up to S$200,000 for terms up to seven years, although the line of credit can be ongoing.
Example: The loan amount for home loans, for instance, depends on the borrower’s age, loan duration, and the type of property you are applying the loan for.
There are three main ways you will be assessed for the home loans loan amount:
- Mortgage servicing ratio (MSR)
MSR indicates the amount you can borrow for a home loan based on your monthly income. The amount must not surpass 30% of your monthly income. For instance, if your salary is $5,000 per month, the maximum loanable amount you can take out is $1,500 each month.
- Total debt servicing ratio (TDSR)
TDSR refers to the limited amount of your monthly repayment plan based on your monthly income. Thus, the sum of your monthly mortgage repayment must not surpass 60% of your monthly earnings.
- Loan-to-value limits
The loan-to-value (LTV) refers to the maximum loanable amount you can get based on the value of the property you are taking out the loan for. Thus, the higher the value of the property equates to the higher the loanable amount.
However, the loanable amount is also subjected to whether you are borrowing from a private lender in which you can borrow 75% of the property value or selling price, depending on which one is lower.
Or, if you are borrowing from the HDB to buy an HDB flat which may allow you to borrow around 55% to 90% of the property value or selling price, also depending on which one is lower.
A car loan, on the other hand, depends on the Open Market Value (OMV) of the vehicle. If the OMV is $20,000 or lower, you can take out a loan up to 70% of the price of the car whereas if the OMV is higher than $20,000, the loanable amount is only up to 60% of the price of the vehicle.
2. Interest rate
Secured loans can offer much lower rates. Thanks to the collateral the borrower has put on. Thus, they charge a lower interest rate to make up for their lower risk of losing profit.
Unsecured loans, on the other hand, refers to the type of loans that allow you to borrow funds without pledging collateral. Hence, interest rates tend to be higher compared to secured loans. Examples of unsecured loans are personal loan Singapore, line of credit, and balance transfers.
See the comparison below:
|Type of Unsecured Loans||Loanable Amount||Interest Rate||Repayment Period||Other Fees|
|Personal Loans in Singapore||Up to 4 times or up to 10 times if the annual salary exceeds $120,000 (bank loan for personal)
Up to 6 times of your monthly salary (moneylenders)
|From 3.88% per annum (banks)
||Generally from 1-5 years (banks)
||Around 1-4% (banks)
|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%|
Pros and cons of secured vs unsecured loans
- Affordable interest rates: Due to the lower risk imposed on the lender, secured loans have lower rates you need to pay for
- Guaranteed approval: With an asset being put as collateral, lenders will see no risk of approving your application for secured loans
- Available for larger amounts: Secured loans tend to have a higher loanable amount, allowing you to gain more money
- Risk of losing your asset: If you ever fail to repay the secured loan within a repayment period, the lender will have the right to seize your asset that the loan was secured with.
- More stringent: Lenders often will require proof that you are spending the money solely for the main purpose of the secured loans
- The loanable 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.
- Lenient expenditure: Unsecured loans are not tied to a specific type of expenses and require no proof of your expenditure
- No risk on your asset: An asset is obviously of great value which can be a big waste if they are seized by the lender. Furthermore, not everyone owns an asset that could qualify them for a secured loan
- Quick and easy: Unsecured loans typically have flexible requirements, and the whole process until you get the money wired into your bank can take less than a day
- Higher interest: Due to the higher risk of losing profit once a borrower defaults, they usually put a higher interest rate in unsecured loan to guarantee a return in profit
- Additional fees: Similar to the higher interest rates, unsecured loans will usually charge additional fees such as monthly fees or registration fees to compensate for their loss if a client defaults.
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 discovered 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 are little chances 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.
So which one should you choose?
In terms of risk, secured loans are less risky for lenders, but secured loan Singapore is much riskier for you as a borrower because the lender can seize your pledged collateral if you do not keep up repayments.
One way to know which is suitable for you is to consider your goals and budget. Ask yourself how much do I need? How much can I afford to pay monthly? If you are looking to alleviate your short-term financial needs and in dire need of immediate cash, A1 Credit Pte Ltd offers a loan that can be processed in as fast as one hour. It is among the top 10 licensed moneylenders in Singapore offering personal loans and other types of loans for over a decade.
Regulated by the Ministry of Law, you can loan up to 6 times your salary and can be paid back up to 12 months subject to terms and conditions of the agreement. With a maximum of 4% interest rate monthly (either secured or unsecured loan), you can be assured that you won’t get into a debt trap.