Loans are perhaps the most important financial products offered by banks and financial institutions. They can help people to meet a wide range of needs such as buying a house or a new car, providing our children with higher education, renovating our house, or simply renovating the house. Loans are also helpful in meeting financial emergencies and getting the required cash for going on a vacation with family or purchasing something expensive. Numerous banks and financial entities offer different types of loans to people around the globe. Even in Singapore, both local as well as foreign banking and financial institutions lend money to people and help them to meet their needs.
All types of loans offered by the banks can be categorized into either secured or unsecured loans. A secured loan is one that is formalized on the basis of a collateral or personal guarantee so that the risks taken by the lender are very low as they can be assured that the money they lend can be recovered even if the borrower fails to make the payments. The guarantee of a personal loan may be property, a house, for example, or a deposit of long-term savings, so that the borrower does not have to solve the deposit to get the money because the bank lends it to ensuring that deposit.
The key of secured loans lies in the fact that they offer the least risk to the creditor, since in the event of default the bank will take possession of the financial asset pledged as collateral security, offsetting the loss that may occur by the non-repayment of the amounts owed by the borrower. A mortgage is the ideal example of a secured loan as it offers the lenders with the security that the money they lend can be easily recovered. They can take possession of the property in case the borrower fails to pay off the loan amount as per the guidelines laid down by the bank.
When creditors lend money they look for a reasonable assurance that the money will be returned. If the borrower has an excellent credit history, it can help calm the fears of the lender, especially if the loan amount is relatively small. For larger loans, however, a guarantee of some sort is usually required, so that the borrower can utilize the same to recover their money in case of default. In simple words, loans backed by collateral are known as secured loans. Basic loans that are issued without collateral security are known as unsecured loans.
The credit available to customers in the form of a credit card is an example of an unsecured loan as the cardholders do not need to provide collateral security, in most cases, to get a credit card. While the issuer of the credit card checks your employment status, annual income, outstanding debts till date and credit scores, the issuer does not ask for any specific guarantee. In other words, if you cannot pay your balance, there is no specific asset that the issuer may seize and sell to recover their losses. The loan is backed mainly by reputation (in the modern world it is your credit score and history). A personal loan is another example of an unsecured loan as you do not need to provide any guarantee or collateral security for availing such a loan.
For example, in the case of a mortgage loan, the loan is secured by the house and the bank can seize and sell it if you cannot pay your mortgage. To ensure that this guarantee is not cancelled before the loan is repaid the lender will impose restrictions on the sale of the house. This is almost always the case of secured loans. The asset used as a collateral security to avail the loan cannot be sold without the consent of the lender. Hence, you will need to make sure that the money that you have borrowed is paid off in full, along with the interest and other charges within the tenor of the loan so that the bank does not get possession of your home.
It may seem that borrowing money for a mortgage, backed by a house, is a risk free proposition for the bank. However, the bank has a clear risk due to two factors. First, the value of housing may fall significantly as many homeowners have discovered during the recent financial crisis. The value of almost anything you provide as collateral security for a loan may decrease. Therefore, the lender may not recover the full value of the loan by seizing and selling the collateral in case of default. Also the process of seizure and sale of collateral is usually a costly process. In case of default, the lender will most likely need to take the borrower to court, and therefore pay the attorney and other legal fees and then incur more expenses in the process of selling the asset pledged as collateral security.
When selling a foreclosed home, the bank must pay for a broker and for cleaning the house. Despite the fact that even secure loans are not fully secure, they provide a greater degree of protection for the lender of unsecured loans. As a result, the interest rate charged with such loans is generally lower, and you can borrow a greater amount when you can provide the required guarantee.
There are a number of benefits which relate to obtaining secured loans as compared to unsecured loans. First, if you own a home and have the ability to provide collateral security to a bank or other lender, then you have a better chance of obtaining credit. Lenders are always concerned about the risk to be taken and if they feel that you will not be able to repay the loan they will be looking for other ways to recover their money. Therefore, if you provide them with some type of security, then they will be more willing to lend the money you need.
Having a good credit score is very important when applying for any type of loan. However, the fact is that lenders will be willing to overlook your bad credit history (if you have it), simply because you have the ability to provide security against the loan. For example, if you have a bad credit score your credit card application or your application for a personal loan will be rejected. However, when you apply for a home loan or a car loan, the bank will be more likely to approve your application as your home or car will act as the collateral for the loan. They are very likely to ignore your credit score and offer you with the required money, probably at a higher rate of interest.
Another advantage of secured loans is that they will usually allow you to borrow more money. Many people in Singapore have borrowed thousands of dollars in these types of loans, usually in the form of home loans, car loans etc. Also, if you need to borrow more money than usual the bank will be more likely to offer you with the same when you provide collateral security. For example, the price of the house that you want to purchase is S$100,000 and the bank that you have approached usually offers loan amounts up to S$90,000. You can negotiate with them and if the feel that the value of the house will not depreciate any time soon, they will be happy to lend you S$100,000 provided you meet all their terms and conditions.
Because a secured loan carries much less risk to the lender, they will be willing to offer more attractive conditions related to the loan. So even if you are borrowing a lot of money and will require a much longer time to pay, you can still ask for lower interest rates and in general a more generous loan agreement. The banks will be more than likely to offer you with flexible repayment options, attractive interest rate and a variety of other features that will be very favourable to you in the long run. They might even lower the processing fee charged for the loan.
Apart from the rate of interest, there are many other fees and charges associated with a loan. When you apply for a secured loan, you will get a fair idea of the fees and charges when you sign the loan agreement. You will notice that the fees are very low compared to an unsecured loan. In fact, many of the banks will not even charge you any fee for pre-payment or pre-closure of the loan. After making a few initial payments i.e. for a few months, you will be able to pay off the loan amount in full before it tenor ends and you will not have to pay any additional fee (or a very high fee) in order to do so.
There are conditions attached to secured loans. First, you must be a homeowner or the owner of a financial asset of value to the banks or financial institution in order to qualify for these loans. If you do not own any property or financial asset, you will not be able to provide collateral or security factor to the bank and so you will not be eligible for these loans. Also note that obtaining a secured loan will put your financial asset at risk if for some reason you cannot keep up with the payments, the lender is entitled to get possession of the asset and sell it to recover the amount borrowed. Therefore, you should carefully consider whether you can afford a loan before applying for one.
The main disadvantage of secured loans is that in case of default you will lose ownership of the property or the asset which had served as security at the time of applying for the loan. For example, if you have pledged your car as collateral to avail a car loan and if you fail to make payments for the loan, the bank will take possession of your car. Similarly, if you have pledged your fixed deposit account for availing a loan, your deposit amount will be confiscated by the bank if you fail to pay off the loan amount. Thus, you should only apply for such a loan when you are sure that you will be able to pay off the loan amount, the interest and all the other charges within the loan tenor, and as per the terms and conditions given in your loan agreement.
In case of unsecured loans, you will not have to worry about losing the possession of your home, your car or any other valuable asset. As long as you have a good credit history, you can easily borrow the money you need and then repay it at your convenience. Even if you are not able to pay off the loan amount, the bank will only send you payment reminders but will not get possession of any of your belongings. The overall of process of applying for an unsecured loan is very simple and you will not need to submit a pile of documents along with the application form.
Although the bank will not take possession of your financial asset, your credit score will be severely affected if you fail to make payments for the loan. Compared to secured loans, the amount of money that you can borrow will be lower for unsecured loans. The interest rate charged will also be comparatively higher and you will need to pay higher amounts of processing fees and other charges. Overall, the cost of borrowing will be higher for unsecured loans and if you want to repay the loan amount before the end of the tenor, you might have to pay a higher amount of fee.
Yes, at times typically unsecured loans can become secured loans. For example, when you apply for a personal loan or a credit card in Singapore you need to have a minimum annual income of S$40,000 or more (for citizens and permanent residents of Singapore) or a minimum annual income of S$60,000 or more (if you are a foreigner residing and working in the country). If you do not meet the income requirements, the lender or card issuer might ask you to pledge your fixed deposit account to get the loan or credit card. The balance in your fixed deposit account has to be minimum S$10,000 and you cannot withdraw the amount till your repay the loan or cancel your card after paying off its balance.
A common mistake when seeking funding is to consider that all loans are equal. This view of financial products is not very helpful as it might lead you to make the wrong choice. On the contrary, there are a number of types of loans that fit different user profiles and needs. In Singapore, people can get loans for almost every need and for all occasions.
Here are some of the different types of secured and unsecured loans that are available to people in Singapore:
Probably the most common type of loan and are offered by numerous banks and financial institutions. They are mainly unsecured and can offer the borrowers with a wide range of loan amounts. They can be utilized for a variety of purposes starting from travel bookings to paying off other debts. Originally, they were regarded as a loan for the financing of intangibles i.e. they were aimed at funding different types of services for the borrower or offering them with fast cash during emergencies. However, these days they are also used by people to purchase different types of products such as electronic items, home appliances, furniture etc.
They are loans designed to finance higher education such as a master or postgraduate degree and more. The features offered with such loans are varied and they offer the borrowers with the possibility of required finances for paying their tuition fees to all the costs related to their course, including hostel accommodation and food. They are mostly unsecured but can also be secured at times if the parents or guardians of the students, who apply for the loan, do not meet the income requirements set by the bank.
Home renovation loan
They are offered to people who want to renovate or repair their homes. The renovation loans are not secured by any collateral or guarantee and are offered based on the credit history and profile of the applicant. They help in renovating or repairing a house and the amount offered is usually not very high.
Loan against credit card
Many of the credit card issuers in Singapore offer loans against credit card limits to their cardholders. They are not secured by any collateral and are offered to those customers who make their payments on time and have a good credit history. The loan amount can be up to 90 percent of the available credit limit of the card and it can be repaid through monthly instalments.
They are also unsecured and are mostly offered by private lenders instead of banks. They usually come with high rate of interest and the borrowers need to pay off the loan amount when they get their pay cheques. The amount offered is very low and the borrowers do not get a lot of flexibility in terms of loan repayment.
Peer to Peer Lending
These days, many wealthy individuals lend money to people at an attractive interest rate. The borrowers and lenders are both private individuals who are not associated with any bank or financial institution and the borrowers do not need to provide any collateral security for such loans. The amount offered is not very high but the process of getting the required money is quite simple in this type of lending.
Line of credit
It is a type of revolving credit offered by banks and financial institutions that is quite similar to a personal loan. However, instead of getting a lump sum amount as a loan the borrowers are offered with a fixed amount every month to help them in meeting their financial obligations.
Mortgage loan or Home Loan
It is probably the most common type of secured loans and is offered by almost all the major lenders in the country. A mortgage loan allows the applicant to borrow money for the purpose of purchasing a house and if the borrowed amount is not paid in full, the lender can take possession of the house. Such a loan comes with very flexible tenors, high loan amounts and attractive interest rates. A variety of home loan products are available in the Lion City.
Vehicle loans help people to purchase the vehicle of their choice and they come with attractive interest rates and flexible repayment tenors. They are mostly secured and the vehicle itself acts as collateral for the loan. They can be availed for purchasing both private and commercial vehicles.
If you have a good credit score and also earn a substantial amount of money every month, you can opt for an unsecured loan as you will enjoy high flexibility in terms of payment options, tenures and other features offered by the bank. Besides, you will not have to take a lot of risk by pledging your prized assets. The application process will be very simple as well and you will need to submit a lot of documents. On the other hand, if you want to enjoy a higher loan amount, attractive interest rates and a variety of other beneficial features, you can opt for a secured loan from any bank or financial institution.
The choice of loan will mainly depend on your financial profile and your requirements. If you are unsure about which loan to opt for, you can always approach a financial consultant and get a fair idea of your available options.