When getting a loan, you will most likely have to choose between secured or unsecured loans. If you are in need of cash to pay outstanding bills or create large purchases such as a house or a car, you might want to consider applying for a secured loan.
There are several different types of secured loans that you can get. Understanding what these kinds of loans are and the difference between them is important in determining which type of loan is the right one for you based on your financial capabilities.
Here, we will discuss the advantages and disadvantages of the secured loans, as well as the factors that you should consider when getting one.
What Is a Secured Loan?
A secured loan is a type of credit borrowers can apply for where banks or lenders require them to put up assets such as real property or cars as collateral to guarantee the payment of the loan.
Normally, the maximum amount that borrowers can apply for is S$200,000 with terms of up to seven years.
If a borrower is unable to pay the loan obligation, the lender can acquire the collateral. Security can be a type of valuable asset, which may or may not be owned by the borrower. The most common type of secured loan is the car loan and mortgage. However, equity, jewelry and even term deposits can be the security for a loan.
Key Difference Between Secured Vs Unsecured Loans
Here are the main differences between secured and unsecured loans:
Compared to unsecured loans, secured loans often come with lower interest rates. For unsecured loans, lenders would be taking a higher risk hence, it’s only logical that they charge higher rates. If you want to save money later on by paying less interest, you should get the secured loan.
As mentioned, lenders would be taking less risks when it comes to secured loans. Hence, they lend higher amounts of money to borrowers when there is collateral attached to the loan compared to when there isn’t.
Because you will be required to put up a valuable asset as security for the loan, secured loans are riskier than unsecured loans for the borrower. You will be faced with the possibility of losing a valuable asset. If you are unable to pay your obligation on time, the bank can seize your asset.
If you secured your loan with your house or your car, it would be incredibly inconvenient for you if the lenders seized them. Losing your house or car to a bank may be more troublesome than getting bad credit scores, which is the worst that can happen if you default on an unsecured loan.
|Secured Loans||Unsecured Loans|
|Lower rate of interest (lower risk for the lender)||Higher rate of interest (higher risk for the lender)|
|Higher loan amount||Lower loan amount|
|Collateral is required||No collateral is required|
|Longer loan term||Shorter loan term|
|Risk to the borrower of losing an asset||No risk to the borrower of losing an asset|
Types of Secured Loans
1. Vehicle loans
If you are planning to buy a car with the money that you borrow, you can use that car as a security. It’s very common for people to apply for a car loan when they’re trying to purchase a vehicle.
The amount that the banks lend to borrowers will be used specifically for the purchase of a brand new car. If they don’t pay the loan on time, the bank can take away the car that they just bought.
2. Mortgage loans
Because purchasing a home or other real estate requires a lot of money upfront, potential buyers usually take out a loan for banks to fund it. And borrowers will mortgage the house to secure the loan.
Similar to vehicle loans, lenders can take the property that you purchased if you default on the payment.
3. Share-secured or savings-secured Loans
If you don’t have any tangible valuable asset available to use as a security for your loan, share secured loans can be an option for you. With your own savings as collateral, you can get a secured loan from a lender.
The most advantageous aspect of this type of secured loan is that you can keep your savings in your account to continue making dividends or earning interest and still make a large purchase by taking out a loan instead.
You will not be losing your savings but you’ll only be using it as collateral. It will serve a double purpose by giving you income from interests and serving as security for the loan.
4. Secured credit cards
A less common type of secured loans that most people don’t know about is a secured credit card. Instead of taking out a one-time loan, you can apply for a credit card and use a cash deposit to secure it.
This way, if the cardholder can’t make payments on his account, the card issuer has the deposit as collateral to fall back on. If you are a subprime borrower or have a limited credit history, this is a good option for you.
5. Secured lines of credit
Similar to a secured credit card, before a lender approves you for a line of credit where you are given an amount of money that you can borrow from whenever you need to, you’ll have to promise an asset as collateral.
The asset can be a real estate or a savings account that the lender can appropriate if you don’t pay on time.
6. Car title loans
This is a type of shorter-term loan where the borrower needs to pledge the title to the car they own as collateral to get a loan. What usually happens is that the lender takes ownership of the car, sells it, and applies the proceeds to the loan amount that the borrower failed to pay. It’s also known as auto title loans.
7. Pawn Shop loans
A pawnshop loan is one of the easiest ways to borrow money and get cash on the spot. Pawn Shops won’t require extensive documentation from you and they won’t do credit checks either.
All you have to do is bring in a valuable asset as collateral that they will assess and use as a basis for the loan amount that they will lend you. An example of a valuable asset that you can bring to a pawn shop would be jewelry.
8. Life insurance loans
Another quick and easy way to borrow money is to borrow money from your life insurance policy, if you already have one. However, you cannot borrow against every type of life insurance policy. It has to be a permanent or whole life insurance policy.
9. Bad credit loans
With this type of secured loan, it’s still possible for you to borrow money even if you don’t have good credit scores. It’s a fixed-rate loan for borrowers with low credit scores and often repaid in monthly installments. This type of loan can be backed by collateral.
Pros and Cons of Secured Loans
- With a secured loan, you may be able to get lower interest rates compared to unsecured loans.
- Because secured loans would be less of a risk to lenders than unsecured loans, qualifying to get one would be easier for lenders.
- Tax deductions are available to borrowers for interest payments on secured loans like mortgages.
- You run the risk of losing your collateral if you default on the loan.
- Borrowers enjoy less flexibility when it comes to the application of the loan amount because the loan use is often connected to the collateral itself.
Factors to Consider When Getting a Secured Loan
There are several factors that you should consider to determine the type of secured loan that would be the right fit for you based on your financial needs and current circumstances. Here are some things that you should keep in mind:
Type of collateral required to secure the loan
Usually, what will determine the type of collateral that a lender would require would be the underlying purpose of the secured loan.The most common example of this are mortgages, where the house being financed by the home loan is used as collateral.
The right collateral for a loan can also depend on the loan amount and the lender. Examples of assets commonly used as collateral include: real estate, bank accounts, investments, stocks, bonds, insurance policies, machineries and vehicles.
The interest rate and annual percentage rate (APR) for the loan
Aside from the type of collateral, borrowers should also consider the interest rate and the annual percentage rate when applying for a loan.
The annual percentage rate is the annual rate of interest charged to borrowers which is the percentage representing the actual yearly cost of funds over a term of a loan.
Because you are risking losing a valuable asset upon default, you should determine if you have the ability to pay the loan combined with any fees or additional costs to prevent that situation from happening.
Fixed or Variable Interest Rates
Annual percentage rates of loans are either fixed or variable. A fixed APR loan’s interest rate will remain the same during the duration of the loan or credit facility, while a variable APR loan’s interest rates may change at any time.
When lenders process a new loan application, they will usually charge the borrower an upfront fee called a mortgage origination fee which serves as a compensation for executing the loan. The amount of the mortgage origination fee will be a percentage of the loan and it will be added up to the total loan.
Minimum and maximum loan amounts
Getting approved for a high loan amount may be beneficial to you in the meantime, but will be harder to pay off in the future. Because defaulting would result in a foreclosure of a valuable asset, make sure to borrow an amount that you would be able to repay based on your current and predicted financial capacity.
Credit score and income requirements for the loan
Just like with any other loans, your credit score and income can affect your chances of getting approved for a secure loan even if you’ll be offering collateral in case of default.
Although, the lender would be taking less risks with secured loans because they can always foreclose the borrower’s asset if he reneges on his obligation, they would still have to assess the risk of entering into a loan contract with a specific borrower by checking his credit scores.
What Happens if You Default on Secured Loans?
If you default on a secured loan, your creditor can seize the collateral to apply to the outstanding balance on the loan. Your lender will file a foreclosure action against you if your loan transaction involves a mortgage or, in the case of a car loan, repossess your vehicle.
If you think that there is a chance that you will default on your secured loan, you can take precautionary steps to lessen the negative impact of the non-fulfillment of your obligation. Try to contact your lender and renegotiate the terms of your loan.
To avoid losing your house or other assets, consider applying for a debt consolidation plan with other banks that offer lower interest rates to pay off your original secured loan. You can even seek credit counseling where qualified professionals can give you debt advice, connect you with the best resources, and help you come up with solutions to solve your financial problems.
Where to Find Secured Loans?
If you are looking to get a secured loan, you can apply for one at banks, credit unions and other online lenders. There are several lenders out there that offer all types of secured loans.
Once, you have found a lender that best suits your financial needs, make sure to check if they are registered with your local financial regulator, the Monetary Authority of Singapore (MAS).
There are several benefits to getting a secured loan like lower interest rates, higher loan amounts, longer loan terms. However, there are also downsides like having to put up a valuable asset as collateral for the loan and running the risk of foreclosure.
Most borrowers prefer to get unsecured loans because it’s considered to be less risky although getting approved for one is harder and more tedious. They would not be facing the possibility of losing their house or car even if they default on their loan obligations.
If you are in a financial emergency but you don’t want to risk putting your assets up as collateral for a loan, you should consider applying for an unsecured loan. Check out 365 Credit’s personal loan and borrow up to six times your monthly salary.