One of the most significant decisions one has to make before applying for a personal loan is whether to choose secured or unsecured loans. Both have their advantages and disadvantages, and the best choice will come down to individual needs and circumstances. In this article, we’ll provide a secured vs unsecured personal loan Singapore comparison, exploring the unique differences between each.
Secured Personal loans
Secured loans require you to provide collateral as security for a loan and typically with a property. Some other interesting securities that are commonly taken are also insurance policies with surrender value or shares of publicly traded companies.
Requirements
To apply for a secured loan, most lenders typically require the following documents on top of the usual NRIC and proof of income.
- Proof of ownership of asset
- CPF withdrawal statement to show how much CPF was used to purchase the asset
- Loan statement for any outstanding loans taken on the asset
It is also important to note, for a secured loan, a borrower has to be over 21 years old and is able to provide collateral.
Advantages of Secured Loans
A Larger Loan Amount: Given the assurance provided by collateral, financial institutions are often more willing to approve larger amounts for secured loans. This is because the risk of monetary loss is diminished, as any potential losses can be recovered through the sale of the collateral.
Interest Rates and Costs are Lower: In comparison to unsecured loans, secured loans tend to have lower interest rates because lenders are taking on less financial risk.
Disadvantages of Secured Loans
Risk to Collateral: The biggest drawback with secured loans is the risk to your asset. Should you fail to repay the loan, lenders have the right to seize your collateral and sell it to recover the loan.
Unsecured Personal Loans
Unsecured loans differ from secured loans, meaning they aren’t backed by collateral. Failure to repay the loan, however, may lead to lenders taking legal action. And because secured loans are riskier for lenders, they charge a slightly higher interest rate compared with a secured personal loan.
Advantages of Unsecured Loans
Speed of application: Solely because an unsecured loan is taken on the basis the salary of the borrower and his outstanding liabilities, the speed of application can be as quick as an instant. There is no need for further legal contracts to take a charge over your asset or even to do a site visit of your home.
Disadvantages of Unsecured Loans
Higher Rate of Interest: As previously mentioned, unsecured loans carry a higher risk for lenders because there is no collateral involved. It is for this reason that lenders tend to charge higher interest rates than secured loans.
Difficulty in Approval: Unsecured loans typically have more stringent application processes and place greater emphasis on credit scores than with secured loans. This is because the way out is solely the borrowers income rather than a sale of an asset.
Secured vs Unsecured Loans: Which Should You Pick?
Secured Loans
Secured loans might be suitable for:
Those with Lower Credit Scores: Borrowers with poor or limited credit histories may find it easier to get approved for a secured loan because the collateral reduces the lender's risk.
Those Looking for Lower Interest Rates: Secured loans generally come with lower interest rates than unsecured loans, which can make them more attractive for borrowers looking to minimise the cost of borrowing.
Unsecured Loans
Unsecured loans might be suitable for:
Those with Good Credit: Borrowers with strong credit histories are more likely to qualify for unsecured loans, which don't require collateral.
Those Seeking Faster Access to Funds: The approval process for unsecured loans is usually faster since there's no need for collateral valuation.
Potential Repercussions for Defaulting
It is important to note that regardless of which type of personal loan you choose, repayments begin the month after and are to be paid monthly. If you keep up with payments, then everything will be fine.
But what if you somehow miss a repayment? Here’s what you can expect:
- For the first offence, you might be given a grace period before being penalised for missing your payment. This is the case for both secured and unsecured loans. Your lender will most likely send you a notification via your registered communication profiles to inform you if you missed a payment.
- After the grace period, the lender may report your missed or late payment to a major credit bureau and this will have an immediate negative effect on your credit score. Your credit score will become worse with every month you miss a payment until you catch up or contact your lender to rectify a solution.
- Following which, if no further remedy is made by you, the lender can choose to take action against you which could result in a seizure and sale of your asset if it is a secured loan.
Thus, you should first confirm that you have the means to repay your loan, regardless of which type of loan you choose to apply for. Taking a loan will give you a financial boost but does not come without risk.
Apply for a Personal Loan at Lendingpot
At the end of the day, whether you choose to apply for a secured or unsecured loan comes down to your unique circumstances. If you are still having doubts on which of the two options to pick, you can always reach out to our team for a consultation or schedule a time with us below.
And if you’ve settled on an option, take advantage of our platform to get personalised bids from over 45 different lenders tailored to your needs at virtually no cost. As ever, we remain committed to helping individuals get the best outcomes in approvals and pricing.
