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Collateral vs. Non-Collateral Loans: What’s the Difference?

collateral vs non collateral loans
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Loans can be effective financial tools to help private individuals and businesses achieve specific goals. They are especially crucial when one wants to do something but does not have the budget or funds to do it. This is when they should consider applying for a loan to help them out.

While many types of loans are provided by financial institutions and licensed money lenders in Singapore, they can all be generally classified into two categories. These two categories are collateral loans and non-collateral loans. A collateral loan is also called a secured loan, while non-collateral loans can also be called unsecured loans.

Collateral vs Non-Collateral Loans: Key Differences

Short answer: The main difference between a secure and unsecured loan is that the former requires the borrower to offer security to guarantee the loan, and the latter does not. Another difference between the two types is that secured loans tend to have longer terms and lower interest rates than unsecured loans. Let us dive deep into each type of loan and see their main differences.

Long answer: To understand the detailed differences between collateral and non-collateral loans, let us look at them by evaluating different parameters.

1. Collateral

As the names of these two loan types suggest, collateral is required as security against a secured loan, while it is not needed for an unsecure loan.

2. Loan Amount

Collateral loans allow borrowers to access large amounts in loan quantum compared to non-collateral loans. This is mainly because the risk to the lender of a secure loan is minimal because of the collateral offered.

3. Interest Rates

Since secure or collateral loans have security, the interest rates offered by lenders and financial institutions providing this type of loan are lower than unsecured loans.

4. Loan Tenure

Again, because borrowers provide security, collateral loans offer more extended repayment periods than non-collateral loans. Some collateral loans have a repayment period of up to 25 years. 

The most prolonged repayment period for unsecured loans, such as education loans, tends to be around 5 to 7 years. Most other types of unsecured loans have a much shorter loan tenure.

5. Processing Time

The processing time for unsecured loans is shorter than for collateral loans. The processing time for non-collateral loans can be as little as just a few hours, and most are processed and disbursed on the same day. 

However, this is not the case with secured loans. These loans have a processing time of between two weeks and a month. This is because of the application process and documentation of the loan and collateral details before processing.

Consequences in Case of Default

If a borrower defaults on their secured loan payments, the lender seizes the collateral and auctions it to get the loan funds. Furthermore, repossession records can last up to 7 years on the borrower’s credit score report.

On the other hand, if a borrower defaults on an unsecured loan payment, there is no collateral to be seized. However, the name will be listed in the credit bureau as a defaulter. This will make it harder to get other loans in the future.

Comparison Table

  Collateral Loans (Secured Loans) Non-collateral Loans (Unsecured Loans)

Collateral

  • Required
  • The loan type and value of the collateral determine the loan amount
  • Not required.
  • The main factor of consideration is the borrower’s ability to pay and past loan repayment history

Loan Tenure

  • Longer (up to 25 years)
  • Shorter (however, some can provide a repayment period of up to 5 or 7 years)
  • With moneylenders, you can have a tenure of 6-12 months

Processing Time

  • Several weeks
  • Same day

Loan Amount

  • Large amounts up to millions
  • Small amounts compared to secured loans; up to 10 your monthly salary with banks
  • With moneylenders, usually up too 6x your monthly salary

Interest Rates

  • Lowest
  • High; with banks, starts from around 3% per annum (Note: EIR is higher)
  • With moneylender, 1-4% per month 

Default Consequences

  • Collateral is seized and auctioned
  • Repossession record appears on borrower’s credit report for a period of up to 7 years
  • Listed as a default with the credit bureau

What Is a Secured Loan?

When applying for a secure loan, the financial institution requires the borrower to provide security. This security can take many forms and is used to guarantee the loan given. There are many types of secure loans (collateral loans); some of the most common are car and mortgage loan. The collateral or security of the loan is any asset with a financial value equal to or greater than the loan amount offered.

Once a borrower takes a secured loan, the lender places a lien on the asset. However, the lien is removed immediately after the borrower pays off the loan.

Since the primary purpose of the collateral is to secure the loan amount, whenever the borrower defaults and fails to pay to repay the loan, the lender then seizes the collateral as a form of payment. 

However, it is essential to note that the lender will typically not seize your assets immediately after you miss your repayment; they will allow for a moratorium period where they will charge additional fees and wait for your payment. 

If the borrower fails to meet their repayment obligations, they will end up seizing the collateral. Apart from losing the ownership rights to your assets, repossession can reflect on your credit for up to seven years.

Best for Who?

Collateral or secured loans are suitable for the following types of people:

  • People with financial assets can use as collateral security against the loan, that is, things such as cars, homes, stock certificates, and others.
  • People looking for loans with large quantum amounts and more extended repayment periods.
  • People looking for the lowest interest rates loans.

In essence, anyone who falls within the groups above can pay the loan can take a secured loan from a bank in Singapore. Licensed moneylenders, on the other hand, do not usually offer secured loans.

List of Assets You Can Use as Collateral

  • Bank accounts such as savings accounts, checking accounts, money market, and CDs accounts
  • Real estate (immovable asset)
  • Vehicles such as cars, SUVs, trucks, boats, motorcycles, etc.
  • Bond investments, stocks, or mutual funds.
  • Insurance policies such as life insurance and others.
  • Valuables and high-end collectibles such as antiques, precious metals, etc.

Types of Secured Loans

businessman with money

What Is an Unsecured Loan?

Unlike the case with secured or collateral loans, unsecured loans do not require the borrower to put up security. These loans are gaining popularity globally because of fintech firms that offer borrowers a wide selection of non-collateral loan options.

Types of unsecured loans

What You Should Consider When Taking a Loan

Whether secured or not, a loan can help borrowers fulfil their goals. However, with each loan comes the responsibility to pay. Here are a few things to consider when taking a loan:

1. Have a Clear Repayment Plan

A clear repayment plan is essential to ensure you do not default on the loan. One should ensure that one can meet the repayment obligation stipulated in the loan contract.

2. Examine Your Debt to Income Ratio

Examining the ratio of your income against debt and debt obligation is very important before taking any loan. It will help you determine whether or not you will be able to meet repayment premiums.

You should ensure that the loan repayment does not affect your essential needs and those that depend on you. Doing so will ensure you continue living stress-free, even with the added responsibility of repaying a loan.

3. Compare Interest Rates

Comparing loan interest rates is vital to get a better deal regarding your loan requirements. When doing this, you should compare a few loan providers to choose the best. Picking a good loan with a low-interest rate will mean you will pay less in interest accrued over the tenure of the loan, and vice versa is true.

4. Understand The Loan Contract

Before signing a loan contract, you should always ensure you understand everything stimulated in the loan policy. You should seek the help of a financial advisor to help explain anything you do not understand.

Closing

Secured or unsecured loan are different with varying parameters and target customers. Some of the main differences between these two types of loans include the following:

  • Secured or collateral loans require the borrower to provide collateral before getting the loan, while unsecured loans do not require collateral. The collateral can be a car, a home, stock options, and other assets with financial value.
  • Secured loans generally have a more extended repayment period and significant loan amounts than unsecured loans.
  • In case of a default with a collateral loan, the lender will seize and auction the collateral provided to cover the loan.
  • The processing time of secured loans is usually longer than that of unsecured loans. Typically, an unsecured loan can be processed the same day, while it might take several weeks to process a secured loan.
  •  Since there is an increased risk to the lender of unsecured loans, the interest rates tend to be slightly higher than those of secured loans.

Finding the best loans can sometimes be challenging. However, this does not have to be the case since, using Loan Advisor, you can compare different loan options. Contact us today to get up to three free loan quotes from Singapore’s top licensed moneylenders.

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