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A Detailed Guide on Secured Loans V/S Unsecured Loans

People can choose from several loan options when they need to borrow money. For example, a person can borrow money from someone in their family. They can use a credit card, or they can also borrow from a financial institution like credit agencies or banks. There are two types of loans offered by banks like a secured loan and unsecured loan. Therefore, you should know the difference between a secured loan and unsecured loan before entering into a loan agreement. 

Loans with a surety and lines of credit are ensured against your assets, resulting in an increase in the loan amount and a decrease in interest rates. While unsecured loans in Singapore allow you to approve faster because no collateral is required. Let’s take a closer look at these two concepts so that you know how to choose the most suitable one according to your economy. 

Table of Content

Why Should You Know About Secured and Unsecured Loans?

What is a Secured Loan?

  • When to Consider Applying for Secured Loans?

What is an Unsecured Loan?

  • When to Consider Applying for Unsecured Loans?

Secured Loans V/S Unsecured Loans

  • Use of Collateral
  • Interest Rate
  • Terms of Secured and Unsecured Loan
  • Credit Availability
  • Tax Implications

Conclusion!

Why Should You Know About Secured and Unsecured Loans?

Knowing what you are going to hire before signing any agreement when it comes to finances. Being able to rely on this knowledge will help you make the best financial decisions for yourself. Every time you ask for money from a bank or even an online lender, you take one of these two loans. 

What is a Secured Loan?

This is a personal loan that is usually backed or secured by collateral. The borrower promises some kind of assets like personal property in order to secure a cash advance. Alternative banks or online lenders will hold the case until the loan amount is paid in full, along with interest and other applicable fees. The examples of secured loans are car loans, mortgage loans, recreational car loans, personal bank loans, small business loans, and construction loans. If the borrower stops repaying the secured loan, the lender can return the collateral to recover their losses. So, be careful and be responsible for the agreed payments in the beginning. 

  • When to Consider Applying for Secured Loans?

The main advantage of a secured loan or line of credit is that you can usually access more money because it is backed by the security of your assets. Because secured loan products require guarantees, the approval process can be longer as guarantees must be processed and verified. It can be worth the extra effort as you will benefit from lower interest rates. Big home reforms and debt consolidation are two cases where you can use a secured loan.

What is an Unsecured Loan?

Unsecured loans involve borrowing money without providing any guarantees, including posting collateral and attracting a guarantor. This popular form of financing attracts the attention of borrowers interested in getting the deal done quickly. Popular types of unsecured loans include most personal loans. This category of financial services includes consumer loans, student loans, and medical loans. 

When to Consider Applying for Unsecured Loans?

The main advantage of an unsecured loan is instant loan approval and less paperwork. Unsecured loans are usually more difficult to obtain because a better credit rating is required since your loan will not be secured by any assets or collateral. While these can be obtained faster, it is important to remember that you are probably paying a higher interest rate. Car loans take less time to process than secured loans and the interest rates are very competitive. Obtaining an unsecured personal loan for home reform projects is ideal because you can quickly access the funds to complete projects at a predictable cost.

Secured Loans V/S Unsecured Loans

Use of Collateral

The first and most noticeable difference between a secured or unsecured loan is the use of the collateral on the loan. In the case of a secured loan, the bank retains the asset as collateral for the loan amount issued to the borrower. An act can be anything that belongs to the borrower like a house, car, financial instruments, or any other property that can be converted into cash. On the other hand, no collateral is required for an unsecured loan. It is usually issued to the borrower based on their good credit standing or good credit history.

Interest Rate

No assets or property of the borrower is held as security in the event of an unsecured loan. The rate of interest charged on unsecured loans is higher compared to secured loans. A higher rate is charged to minimize the risk of loss faced by the financial institution. Sometimes the interest rate on these loans is higher than the interest rate charged on credit cards. The interest rate on an unsecured loan is usually fixed. However, an unsecured line of credit like a credit card, with a variable interest rate is also available in the market.

Terms of Secured and Unsecured Loan

The term of the secured loan is longer than the term of the unsecured loan. This is done to reduce the risk by providing a short period on the unsecured loan. With the risk associated with an unsecured loan, banks tend to keep the loan term short so that the borrower can repay the loan as soon as possible. It is for this reason that the amount of an unsecured loan is comparatively less than a secured loan. On the other hand, secured loans come up with a longer-term. And in the case of the real estate market, this term can be up to 30 years.

Also Read: Ways Which Can Ensure a Quick Home Loan Approval

Credit Availability

In the case of a secured loan, there is no need to establish a relationship with a bank or a good credit history as the asset is secured against a loan. It is not easy to get unsecured loans as not everyone can qualify for this loan. A bank usually requires an outstanding credit rating and a strong client relationship before issuing an unsecured loan. Sometimes banks refuse to issue a loan if the client does not provide collateral for the loan. Even the overdraft protection for the checking account is not provided to the client unless it is linked to a savings account.

Tax Implications 

In the case of a secured loan, you can write off the interest rate for tax purposes. This can be done if the primary property like home is secured as collateral for the loan. However, it is important to understand that you are risking your property if you cannot repay the loan. On the other hand, you cannot write off the interest rate for tax purposes in the case of an unsecured loan, because there is no collateral.

Conclusion!

Both secured and unsecured loans serve to meet your financial needs. However, before you take a study loan or any other loan, it is advisable that you understand the pros and cons of your loan option. It is also important that you know the lender with whom you are requesting the loan, fees, charges, terms, conditions and eligibility criteria. Regardless of the loan product, make sure you repay your loan responsibly. With the help of a credit comparator, you just need to choose the most suitable one for your economic condition. 

Charles Yee
I’m Charles Yee, working as a Directer and content writer at Cash Direct LTE, well known Finance Company offering personal loans, wedding loans, study loans, home lonas, car loans and other financial schemes.

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