lady thinking of taking secured or unsecured loan

Singapore has an excellent selection of personal bank loans you can use for any purpose. However, Singapore bank personal loans may confuse you with an option to use secured or unsecured loans. 

The key difference between the two is that unsecured loans require no collateral but often accompanied with higher interest rates. Secured loans, on the other hand, are basically loans that require approval with lower interest rates.

We can help you cut through the confusion by explaining both secured and unsecured loans in a detailed but understandable way.

Secured Loans

These are basically loans that require approval. If you have good collateral, you won’t need to work your credit scores so much.

1. Collateral Necessities

Having collateral sets apart secured bank loans personal from an unsecured loan. Collateral is anything you possess that has excellent value. 

To explain this on a smaller scale: a friend lends you cash for your vacation but requests to borrow your house until you return and pay the cash value by the door.

This can be your house, car, or any item of value that banks and financial institutions indicate.

2. Types Available in the Market

  • Mortgage Loan

Buying a house nowadays requires an enormous sum of money. Mortgage loans pay for the entire property’s value. 

The arrangement allows both of you to own the property simultaneously, and your regular payments reduce the bank’s partial ownership of your property. If you fail to pay your mortgage completely, the bank will own the property.

  • Car Loan

Like mortgages, car loans allow you to purchase a vehicle through the lender. You and the lender have simultaneous vehicle ownership, and your regular payments reduce the bank’s share in your car. Failure to pay them regularly results in the vehicle’s reclamation and full lender ownership.

  • Non-Recourse Loan

This is a collateral-centered financing product, meaning banks can only receive all approved collaterals as payment if the borrower defaults. The lender cannot pursue the borrower for additional compensation, even if the collateral has devalued.

  • Home Loans

Mortgages cover payments for lender-owned properties. A home loan functions similar to personal loans, complete with interest rates. Its purpose is to purchase the materials, supplies, labor, and other necessary supplies for building structures from the ground up. 

Unsecured Loan

A financing option that is heavily dependent on credit scores. Approval rates are relatively faster than secured ones. However, borrowers have lower loan limits and higher interest rates.

1. Credit-Based Borrowing

Truthfully, a credit card is an excellent example of an unsecured loan. However, because it does not provide an enormous sum equivalent to a house’s value, its high-interest rate doesn’t put borrowers at risk of defaulting. Without collateral, unsecured loans have higher interest rates and smaller loan amounts you can borrow.

2. Revolving Credit

Revolving or line of credit is a no-term, unsecured loan from banks. Typically, financial institutions provide this to borrowers who have successfully completed numerous high-value secured loan commitments. Because of their excellent reputation, these borrowers receive revolving credit privileges.

Their difference with credit cards: credit cards have lower credit limit values than revolving credit. For example, credit cards make shopping convenient, but a line of credit can finance a party.

3. Term Loans

A small personal loan from a financial institution or licensed moneylender is an example of term loans. Unlike a line of credit, these have loan tenors and fixed interest rates. Its significant difference with typical loans: it has higher interest due to the lack of collateral unless you have an excellent fiscal reputation indicated in your report.

4. Consolidation Loans

An unsecured loan by nature, consolidation loans focus on using low-interest financing to help a struggling borrower with wealth management. Debt consolidators will negotiate with lenders to lower interest rates or lengthen loan terms, aiding the borrower’s efforts to repay all their financing. Consolidation loans can sometimes pay low-amount loans completely.

Pros and Cons of Secured and Unsecured Loans

Both types of financing aren’t perfect. However, they can be advantageous in certain situations. 

Secured Loans

Pros

  • Better Loan Options

If you’re not in a hurry, a secured personal loan offers better and higher loan options for you. Anyone who owns valuable properties can use it as collateral to finance an entire college fund, new property, or business investment.

  • Lowest Interest Rates

One of a secured loan’s best advantages is to significantly lower your interest rate. Despite a low credit score, borrowers with collateral can offset their perceived default risk. In doing so, their interest becomes lower than before, but they risk losing their collateral.

  • Effective Credit Score Supplement and Builder

Collateral allows you to take on high-tier loans, guaranteeing better reputation grades once you accomplish paying for it.

Cons

  • Does Not Aid Default Risk Stated in Credit Reports

Banks still have their eye on you despite your reputable standing and collateral use. Even with your collateral, the item’s value may degrade over time, putting them at a loss if you default.

  • You Can Lose Properties 

Your collateral serves as a debt safeguard. If you default, you lose your home, car, or other valuables to lenders.

  • High Amount Loans are Liabilities

When you default, you lose all collateral. However, if it isn’t a recourse loan, your high-amount loan remains a liability. You’ll still need to pay the remaining sum through a regular payment plan.

Unsecured Loan

Pros

  • No Collateral

Without collateral, banks will use your credit report as the basis for your loan application. Licensed moneylenders approve non-collateral loans if you have complete requirements.

  • Fast Loan Application Approval

With banks, the loan approval process becomes slower due to intensive personal financial history investigation. Licensed moneylenders approve applications within an hour in good borrower faith.

  • Flexible Payment Options

Both banks and licensed moneylenders offer borrowers flexible payment options. However, moneylenders provide even more flexibility because they cater to low-income borrowers.

Cons

  • Limited Loan Options

Because of its unsecured nature, banks and licensed moneylenders cannot provide higher loan amounts.

  • Often Reaches Ceiling Interest Rates

Both banks and moneylenders will start from the maximum interest rate possible. Banks will reduce it according to data they gather from your fiscal history.

  • Credit Reports Play an Enormous Role

For banks, credit scores are the most significant indicator of trustworthiness for borrowers. If you borrow from licensed moneylenders, you won’t have the same problem.

Where They DifferSecured LoansUnsecured Loans
SecurityCollateral assets for securitiesCredit-based security
InterestLower interest due to low riskHigher risk therefore higher interest
ProcessingTakes time due to collateral investigationsDecreased due to lack of collateral investigation. Requires extensive requirements
AvailabilityPresence of security and good credit increases available optionsProcess is easily available through moneylenders. Banks perform tough and lengthy credit checks
CreditCollateral amplifies low credit scores Licensed moneylenders do not consider credit scores. Banks depend greatly on credit reports.
UsesAny purposeShort-term purposes
Size/Loan ValueAll kinds of loan amountsSmall and medium amounts

All That Matters is You Fulfill All Your Responsibilities

Knowing your needs and consequent financing liabilities is much more crucial than choosing whether a secured or unsecured loan is better than the other. Keep in mind: financing is a privilege. It isn’t something that you can freely use without consequences.

If you need excellent unsecured loans with zero credit report requirements, you can always count on Raffles Credit’s offers.