When looking to get their first personal loan or business loan, young people and entrepreneurs have a hard time getting all of the right information straight. There’s a lot of contradictory information as to what is an unsecured loan and how viable they can be.
This post goes into detail as to what is an unsecured loan, the eligibility criteria needed to get one, and how to get one in Singapore.
What is an Unsecured Loan?
Unsecured loans are based purely on the creditworthiness of the borrower, not on the assets that the lender will be able to liquidate in the event of a default.
The average bank or institutional loan is usually secured by what is known as collateral. Collateral is something valuable that is posted up by a borrower and is usually of higher value than the loan itself.
It allows the lender to remain at peace knowing that even if the money is lost or spent, they can be able to recover the borrowed amount by selling the collateral, known as liquidation.
For example, most mortgages have the house itself as collateral — if the borrower fails to pay the loan back on time, the bank will simply take possession of the house.
However, people who need loans the most would probably not have valuable assets at hand.
There are people who find themselves in situations where they require large sums of money without having any collateral to post.
Where will Unsecured Loans Come Into Place?
This is where unsecured loans come in handy — since there’s no need to post collateral, they become a lot more accessible to more people.
A young businessman who wants to start a new venture, for example, will have nothing to offer an institution. He would then look for an unsecured loan, which is simply a loan that has no collateral tied to it.
The interest paid on a loan is typically based on simple arithmetic — it represents how much risk the lender is incurring.
If a loan is low-risk, a lender would be willing to accept a lower interest rate since they have a higher chance of being paid back.
Since a high-risk loan is more dangerous, a lender would expect a higher rate of interest from the borrower.
Unsecured loans, if left unpaid, leave the lender with no recourse or recovery. There is no asset that can simply be liquidated, we can relate this to secured loans.
Thus, unsecured loans usually have a far higher interest rate than secured loans due to the higher risk that the lender is incurring during the transaction.
Factors That Determine Your Creditworthiness for an Unsecured Loan
Despite the name, unsecured loans can’t be given to just anyone. Even though unsecured loans aren’t backed by collateral, banks still have to perform risk assessment procedures in order to find borrowers who are most likely to pay back the loan on time.
This is dependent on factors such as:
- Credit/past borrowing history
- Current savings or holdings
- Duration & reason for the loan
- Income/salary/expected cash flow
The first factor is self-explanatory — people who already have an established history of good credit (that is, paying previous loans back on time) will be moved to the top of the list.
People with large amounts in savings or assets will also be considered less risky since they have a greater ability to pay back the loan.
Even if the lender has no control over the said assets, they indicate that the borrower possesses a better ability to repay the loan (but the interest charged will still be much higher than if the assets were in the lender’s control as collateral).
And of course, if the borrower has a steady and predictable income from a trusted employer, then that becomes one of the biggest factors in determining their creditworthiness since it becomes a source from which the borrower can repay the loan.
Unsecured Loan Structures in Singapore
There are several structures for unsecured loans. Here is a summary of a few of these structures are as follows:
- Personal Loan: This is usually a lump sum loan given to you with stipulated monthly payments, and the period of repayment can be several years.
- Line of Credit: This allows you to temporarily borrow money from the bank to fund bigger purchases if you don’t have the cash on hand. The limits are lower and the interest is higher, but since interest can be prorated daily, you can save a lot if you pay back the loan earlier.
- Consolidation Loan: A loan like this allows you to consolidate your existing loans (personal loans, credit cards, etc.) into a new single loan with a lower average interest rate. This can save you a lot of money since your new interest payments will be lower.
Are You Looking for the Best Place to Get an Unsecured Loan in Singapore? Try out Credit Excel Capital.
Are you looking to dive into your first unsecured loan? There are a lot of predatory institutions out there looking for a cash grab with obscene interest rates, and on the other hand, banks often require a lot of personal information (whilst providing lower lines of credit).
You can avoid all of these pitfalls by going with Credit Excel Capital, a top-notch licensed moneylender in Singapore.
The structure can be customized based on your necessity and creditworthiness, and the reasonable interest rates are significantly better than most other predatory lending agencies.
Feel free to contact us today to get the best possible deal on your next unsecured loan, no matter who you are or how much you earn.