Are you looking forward to filling a financial shortfall in your budget and have been wondering what the best option is? Some of the top options that you might want to consider are personal loans, small loans (micro loans), and secured loans. However, a secured loan stands out from the pack, particularly because of the low-interest rates. So, is it the best loan for you?
To help you make the right decision about using a secured loan, we will dig deeper into secured loans in Singapore, compare them with unsecured loans, identify the assets you can use as collateral, and the process of application.
How Does a Secured Loan in Singapore Work?
A secured loan, also called a collateral loan, is a form of credit that is backed by an asset. By putting forward an asset to act as collateral, it implies that the lender is able to cut down the risk involved in lending cash to a borrower.
One good example of a secured loan is a home mortgage, where the house is used as collateral for the money lent to you. If you do not have collateral to put through, this might not be a good option for you. Consider taking an unsecured loan in Singapore, such as a personal loan.
Comparing Unsecured to Secured Loans in Singapore
The primary difference between a secured and unsecured loan in Singapore is the use of collateral. You cannot be able to take a secured loan without collateral, such as housing. Therefore, the amount that you can get is largely pegged on the value of the collateral you want to attach. Note that this has to be your personal asset with all the supporting documents.
At this point, we must emphasise that although moneylenders have their eyes fixed on the asset/ collateral, it is not the only thing they factor. Since the intention is to lend you money and repay without defaulting, they also thoroughly evaluate your repayment ability. So, yes, you must have collateral, but you also need proof of income as a demonstration that you will be able to repay.
In the case of an unsecured loan, the lender does not factor the collateral. Instead, your income and creditworthiness are the primary determinants of whether you will qualify for a loan or not. If you have a low credit score, the unsecured loan in Singapore will attract higher interest rates. This is why you should start the process of applying for a personal loan with an effort to improve your credit score.
Advantages and Disadvantages of Using Secured Loans in Singapore
Taking a secured loan comes with benefits and risks, and it is prudent to understand them before signing the loan agreement. Check out some of them below and make up your mind whether to go for it or a different type of credit:
Pros of Taking Secured Personal Loans
This is probably the most notable advantage of using secured loans in Singapore. By putting forward collateral, you tell the lender, "Look, I can repay the loan and if I am unable, you can sell the asset." This assurance is what makes lenders have the courage to charge lower rates compared to that of unsecured loans. If you have an excellent credit score, good collateral loan, and solid monthly income, the interest can come down even further.
You can Borrow More Cash
If you have a high-value asset, such as a prime property or high-end vehicle, the lender will be willing to offer you more cash. Therefore, it is correct to say that what you can borrow will be based on the value of the asset attached as collateral. This is why you should attach the details of the property valuation to be used as security for lenders to make a decision on what they can lend you.
You Get Better Terms
Licensed moneylenders in Singapore are willing to offer better terms, especially the loan tenure for secured loans compared to unsecured ones. For example, a mortgage can take more than 20 years, which means that you will only be paying a very small amount every month to avoid a major disruption in your financial health.
You can Get a Loan even with a Poor Credit Score
Since you are using your asset to act as collateral, lenders will be willing to work with you even when the credit score is poor. They hold the view that because you have committed the asset, you will put every effort to clear the loan and avoid it getting disposed to repossess the loan cash.
Cons of Using Secured Loans
The biggest issue with secured loans is that your asset is at risk of getting sold to recover the cash borrowed if you fail to pay. To avoid this, you need to strictly follow the agreed repayment schedule until the entire loan is cleared.
Another disadvantage of using a secured loan is the risk of damage to your credit score if you fail to honour the loan repayment agreement. This can be a very serious issue because it can compromise your ability to get credit from any lending institution in Singapore in the future.
Assets that You can Use as Collateral Loan in Singapore
After checking the pros and cons associated with secured loans, have you made up your mind? If you have, here are some of the assets that can be used as collateral loan in Singapore:
- New vehicle
- Used vehicle
- High-value assets
- Term deposits
- Equity in your home
What should You Do if You Cannot Pay Your Secured Personal Loan?
Being unable to repay a secured loan is the last thing that you would want to imagine because of the risk of losing assets attached as collateral loan. However, it happens quite often, and it is important to not only be prepared for the best, but also imagine the worst. So, if it becomes challenging to repay the loan, here are a few things that you should consider:
Renegotiate the Terms and Conditions of the Loan
If you are finding it challenging to repay the secured loan because of shrinking income, a good idea might be to renegotiate the loan’s terms and conditions. You will realise that most licensed moneylenders are willing to help you restructure the loan instead of defaulting. For example, if you had signed a loan agreement committing to paying $2,500 every month, but because of job loss, you can now only manage to pay $2,000/month, the lender might be willing to make adjustments.
When restricting your loan, it is prudent to note that the new terms and conditions are likely to attract additional charges. Therefore, ensure to compare not just the interest rates after restructuring, but other parameters too. For example, how long will it take to clear the restructured loan? What is the amount payable?
Go for Debt Consolidation
Although debt consolidation is only allowed for unsecured loans, it can also come in handy to make repaying secured loans easy. If you have a lot of high-interest loans that are taking the bulk of your monthly budget, consolidating them can help to release some cash.
As you combine the unsecured loans into a single low-interest loan, the money that was previously going to service debts can now be directed to repaying the collateral loan. It will also be pretty easy to follow with repayments because most of the loans that were problematic have already been reduced into a single line of credit.
Go for Debt Counseling
If things are really bad and paying the secured personal loan is proving more difficult, getting professional assistance might be all that you need. With an expert at hand, you will be assisted to take a different approach to debts and finally develop a way to knock them down. For example, the expert might assist you in looking at areas where you can cut costs and avoid defaulting (what is the cost of living in Singapore?).
Think of a situation where a borrower and his wife drive to and from work every day in separate vehicles. In such a scenario, you might be able to save a lot of money by taking one car to and from work or using public transport. Then, the cash can be directed at paying the secured personal loan.
How to Apply for a Secured Loan in Singapore?
Despite the fact that secured loans come with lower risk for lenders in Singapore, the process of application is still tedious and lengthy. The delays are mainly caused by the requirement for verification of the asset being put forward. For example, if you are tagging your personal car, the lender will want to ascertain its actual value. However, you can shorten the loan application process by a huge margin and increase the chances of getting it approved by working with lender comparison sites.
One example of a lender comparison site is Lendela, which helps to simplify the process of loan applications for borrowers. As of today, Lendela is solely offering loan comparison and matchmaking for unsecured loans, but we may be able to assist you in your search for the best possible secured personal loan in the future.
Just as for unsecured loans, if you submitted an application for a secured loan in Singapore, Lendela would use advanced matching algorithms that help to identify lenders who are ready to work with a borrower having qualifications like yours.
Then, you would receive offers from the lenders, and select the preferred one. Finally, Lendela would help you book an appointment with the selected lender to sign the loan agreement. Always consider selecting the lenders with the lowest interest rates.
If you want to borrow funds and target the lowest interest rates, this post has demonstrated that a secured loan in Singapore might be an excellent option. Because you are putting forward collateral to cut down the risk involved, most lenders in Singapore will be willing to loan you at a lower interest rate. Make sure to stick to the agreed repayment schedule because defaulting could result in the sale of your asset.