Google “secured loan” and you’ll get this definition: a secured loan is a loan backed by collateral, which can be used as payment to the lender in the event the borrower does not return the loan. Wait, what does this mean?
If you’re new to taking loans you might have questions like:
- Why, despite the huge sums of money involved, the interest rates of home loans almost always hover around 1% to 2%?
- How come personal loans and credit card bills carry much higher interest rates even though they involve relatively smaller amounts of money?
- What is collateral and what happens if you can’t repay your secured loan?
Not all loans were created equal. In this article, we’ll explain the different types of loans so you’ll understand better.
Summary of What You Need to Know about Secured and Unsecured Loans
Questions on secured and unsecured loans
What’s the difference between secured and unsecured loans?
As opposed to unsecured loans, secured loans require collateral, tend to have lower interest rates, higher loan amount approval and a longer loan tenure
What are some examples of secured loans?
Home, life insurance and vehicle loans.
What are some examples of unsecured loans?
Personal, renovation, student and credit card loans
What does my credit score have to do with anything?
The worse your credit score, the less likely your loan will get approved.
Related article: Guide to Mortgage and Housing Loans in Singapore
What’s the Difference Between Secured and Unsecured Loans?
The main difference between secured and unsecured loans is what happens when you default on your loans.
Secured loans are loans with an asset attached, which the lender has the right to take away if the borrower cannot repay the loan within a specific period of time. The asset, in this case, is also known as a ‘collateral’, and the loan is called a ‘secured loan’ because the collateral acts as a security or safety net for the lender.
Your home loan is one such example: if you took a loan from a bank to finance your home, the home itself is the collateral. In one of the worst-case scenarios, the bank may seize your home and put your property up for auction.
That said, seizure of collaterals is usually the last resort, and banks are more than willing to help defaulting borrowers with ample opportunities to make good on their debt — though not without additional fees that you have to pay.
While this may seem intimidating, there are many advantages to secured loans. For instance, since there is collateral involved, lenders tend to offer a lower interest rate, a higher loan amount approval, and a longer loan tenure. That’s why you can borrow even a million dollars and take decades to pay off the debt at relatively low interest rates of around 2%.
Unsecured loans, on the other hand, are loans that do not come with an asset attached. This means that if you somehow fail to repay the loans in time, you don’t actually stand to lose any assets.
Now, before you presume that unsecured loans are undoubtedly the better option between the two, there’s a catch: since there are no assets attached to unsecured loans, interest rates are naturally much higher than their secured counterpart.
What Are the Most Common Types of Secured and Unsecured Loans?
The most common types of secured loans are home loans and car loans. If you are taking out an HDB loan or a bank of your choice, that is a form of secured loan. In this case, the property you are trying to finance is the collateral.
The most common types of unsecured loans are credit cards, personal loans and student loans.
How Your Credit Score Fits into All of This
A credit score is essentially a number that financial institutions consider before they decide whether to lend you money. The exact formula is not published, but your credit rating or score is generally based on a myriad of factors, such as your spending activity, how long you have been with a specific bank, how much credit you have, your annual salary, your length of employment, etc.
After analysing all the data, each account holder is then assigned a credit score between 1,000 (the worst) and 2,000 (the best), which indicates how good (or bad) you are at repaying your loans. For more information, read our article—Credit Bureau Report Guide: Why a Good Credit Rating is Important for Your Home Loan.
If you default on your home loans—or a loan of any kind—your credit score will be affected. A poor credit rating may make it harder for you to apply for future loans.
On a more positive note, keep in mind that your credit score is based on just the last 12 months of account repayment history, which means that it is in fact possible to rebuild from a bad credit score to a good one.
If you have concerns about your home loan eligibility and are unsure if you’ll qualify for a mortgage, our Home Finance Advisors can help you look into it and provide personalised recommendations.
More FAQ on Secured Loans in Singapore
What Is a Secured Loan in Singapore?
Secured loans are loans backed by collateral that can be used as payment in the event you do not return the loan.
Are Secured Loans Easier to Get?
Yes, as lenders experience lower risk due to your financial assets being used as collateral.
What Are Examples of Secured Loans?
Mortgage, l ife insurance and vehicle loans are a few examples of secured loans.
Is Renovation Loan a Secured Loan?
No, renovation loans are unsecured loans. Plus, you can only use it to pay for renovation works, not new furniture purchase.
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