If you have been shopping around for a personal loan, you may have found two types of loans; secured and unsecured.
A secured loan needs collateral, meaning the bank may take something you own if you cannot pay back the loans under the agreed terms. On the other hand, an unsecured loan does not require any collateral for you to qualify.
Here is an in-depth look at the difference between secured and unsecured loans:
Secured Vs. Unsecured Loan
Now that you know the main difference between secured and unsecured personal loans, here is a deeper dive into how they differ:
| Type of Loan | Unsecured Loan | Secured Personal Loan |
|---|---|---|
| Collateral | None | The asset you are loan the funds for. Examples of the collateral include: Vehicle, Property, High-value assets, Fixed deposits |
| Interest rate | Can be high due to the high risk to the vendor | Lower than unsecured personal loans |
| What happens if you can’t settle the debt on the agreed terms | Negative effect on your credit score: You may not be able to access credit in the future | The lender will possess the collateral. |
Secured Personal Loans
Secured loans are types of loans that require the borrower to offer collateral. They are often protected by an asset such as a car or a home. The lender holds the title or the deed until the borrower fully pays the loans. Other items that can be used as collateral include bonds, stocks, and personal property.
How It Works
Secured loans are typical for large amounts of money. Most lenders will only lend large amounts of money when they know it will be repaid. Putting your home or car as collateral is a way to ensure that you pay the loan according to the agreed terms.
Secured personal loans are meant for new purchases and can be used as home equity lines of credit or home equity loans. These are types of loans calculated based on the current value of your home minus the amount you still owe. These types of loans use your home as collateral.
Taking a secured loan provides security to the lender that the loan will be repaid. If you default on the secured loan, the lender will sell the item you provided as collateral to settle the loan.
Examples/Types of Secured Loans
- Auto loans: You can obtain a car loan through a bank, a dealer, or a credit union.
- Mortgage: A mortgage is a secured loan used to pay for a home. The monthly mortgage repayments will consist of the principal, taxes, insurance, and taxes on the home.
- Boat Loan: A boat loan is used to purchase a boat. Like car loans, a boat loan involves a monthly installment and interest rate that various factors will determine.
- Home Equity Line of Credit: Also known as HELOC, A Home Equity Line of Credit loan allows you to borrow money from a financial institution using your home as collateral.
- Recreational Vehicle Loan: This loan is used to pay for your motor home. In some cases, it may cover the payment of a travel trailer.
Pros and Cons
A secured loan has its good side and drawbacks as well. Here is a look at the advantages and disadvantages of getting a secured loan:
The Pros
- Approval is less likely to be affected by your credit history
- Higher loan amount
- Lower fees and interest rates
The Cons
- You stand to lose your collateral if you default
- You might end up adding on any shortfall after losing your collateral
Unsecured Loan
Unsecured loans are the complete opposite of secured loans. They do not require any collateral. Unsecured loans include student loans, credit cards, or personal or signature loans. Lenders often take more risk when giving out these types of loans since there is no collateral to recover the loan in case you default.
How It Works
Unsecured loans often have higher interest rates when compared to secured loans. The lender trusts you to repay your loan based on your financial resources. To get the loan, you will be judged based on the five Cs of credit. They include:
- Character: This includes your employment history, credit score, and references.
- Capital: This is the amount you have in your savings and investment accounts.
- Capacity: Your income and current debt.
- Conditions: The terms of the loan.
- Collateral: The assets that you can offer as collateral, including your car or home.
The above are the criteria used to assess your ability to repay your debt, including your current financial situation and the general economic factors. It is important to note that the five Cs often vary for business and personal loans.
Examples/ Types of Unsecured Loans
Here are the different types of unsecured loans:
- Student loans: These loans are used to pay for college and are available to students through the Department of Education and other authorized private lenders. Tax returns can be used to repay unpaid student loans.
- Credit Card: There are different types of credit cards available, but the typical credit cards will bill you once a month and charge interest if you do not pay the balance in full and on time.
- Personal Lines of Credit: Personal Lines of Credit have an approved use limit, similar to a credit card. You can also use it to purchase almost everything; you only get charges on the amount you spend from the credit line.
- Personal (Signature) Loans: These loans can be used for many purposes and can vary from a few hundred to tens of thousands of dollars.
- Some types of home improvement loans.
Pros and Cons
Unsecured loans come with their advantage and disadvantages as well. Here is a deep dive into their pros and cons
The Pros
- No collateral to get a loan
- Unsecured loans have more flexible terms
The Cons
- Usually hard to obtain unless you have a good credit history.
- Higher interest rates because the risk to the lender is higher.
What Can You Do If You Are Unable to Pay A Secured or An Unsecured Loan?
The last thing you and your lender wants is for you to default on your debts. However, unavoidable circumstances can make it difficult to pay off the loan on time. In case that happens, here are some options you can consider:
1. Renegotiate the Repayment Terms with Your Money Lenders
Consider asking your creditors to extend the loan tenure. Most financial institutions are ready to restructure the loan than have you default the loan.
2. Sell Stuff Online
Another great option is selling some of your possessions to raise money for the monthly instalments. You can take advantage of the following you have online or use some online marketplaces such as Facebook to sell stuff to raise funds.
3. Get A Side Hustle
A side hustle is another excellent way to diversify your income. You can sell as a service online such as graphics designing or copywriting, to substitute your income. This way, you will be better positioned to raise the monthly loan repayments without looking for money elsewhere.
Read Also: Home Based Business Singapore and How to Earn Passive Income in Singapore
Closing
Before choosing between the two types of loans, it is essential to consider each loan’s consequences if you cannot settle the debts. You may lose collateral if you cannot pay off a secured loan. It is, therefore, essential to ask yourself if that is something you can deal with in case that happens.
In the case of unsecured loans, you must be sure that you are in a position to foot the high-interest rates. There are severe consequences on your credit history if you cannot pay it off. You might not be able to take loans in the future and, in other cases, hurt your chances of landing a good job.
Key Takeaways
- Secured loans require collateral to get approved.
- Secured loans have a lower interest rate compared to unsecured loans.
- Unsecured loan approval depends on different factors, including your credit and employment history.
If you are looking for a loan to fund your goals, Loan Advisor got your back! Contact us now, and we will respond promptly with quotes from licensed money lenders in Singapore that match your needs.
