Unsecured Loan
An unsecured loan is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Unsecured loans are so named because they are not backed by any asset. This means the lender does not have any collateral it can repossess in the event the borrower is unable to repay the debt. For this reason, unsecured loans tend to have higher interest rates than secured loans, such as a home or car loan, where the property or vehicle is collateral the lender can repossess in case of default.
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3 Characteristics of Unsecured loan:
Multi-purpose:
They can be used for a range of purposes, from buying consumer goods such as furniture and electronics, to funding your wedding or honeymoon, to consolidating your existing borrowings with different banks and financial institutions under a single credit card.
Based on your creditworthiness:
Whether and how much you can borrow depends on the banks’ assessment of your creditworthiness – or your ability to repay – which is, in turn, influenced by factors such as your monthly salary and other loan commitments. The bank will check your credit rating before determining how much to lend you.
Can be term or revolving loans:
These determine the duration of your repayment.
| Term Loans | Revolving Loans |
|---|---|
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Requires a set number of payments, made over an agreed period. |
There are usually minimum monthly payments, but no fixed period to repay the loan. You can repay as quickly or as slowly as you like.
Note, however, that the longer you take to repay, the more interest charges you'll accumulate.
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Examples include personal loans. |
The bank offers you funds up to a certain credit limit, which is drawn down when money is borrowed and returned when money is repaid. |
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Examples include credit cards and lines of credit. |
3 types of Unsecured loans: personal loans, lines of credit and balance transfers.
| Basis | Personal Loan | Line Of Credit | Balance Transfer |
|---|---|---|---|
|
Meaning |
A general purpose loan with regular payments spread over months or years. |
An arrangement between you and the bank, which sets an amount of funds you can choose to borrow (called your "credit limit") |
Allows you to consolidate debts from various accounts/ credit cards into a single credit card at lower interest rates |
|
Loan Type |
Term |
Revolving |
Revolving |
|
Repayment Period |
Generally varies from 1 to 5 years |
Not fixed as borrowing funds are repaid, you can borrow again, up to your credit limit. This is called "revolving credit" |
Generally 6-12 months, subject to minimum monthly payments (like for credit cards) |
|
Loan Amount |
Typically up to 10 times of your monthly salary |
Typically up to 4 times of your salary, or 10times if your annual income is more than S$120,000 |
Determined by the lender |
|
Interest Rates |
From 3.88% per annum (p.a.) |
Around 20.5% p.a. or 0.06% per day, typically lower than credit card rates |
From 5% p.a. after processing and other fees are included |
|
Other Fees |
Processing fee: Around 1%-4% |
NA |
Administration fees: Around 4%-7% |
Features and Benefits
Easy and convenient loan application
Unsecured loans generally have an extremely easy and convenient application process. Customers are not required to visit the branch of the lending bank frequently to avail this type of loan. These loans are also available through online application and are very easy to avail.-
Quick turnaround time:
Banks offer quick and speedy turnaround time on unsecured loan applications. These loan applications are processed fast and sometimes even under 24 hours. This makes unsecured loans an extremely handy financial tool in times of an emergency monetary crisis. -
High Rate of interest:
Since borrowers do not need to provide any collateral to avail an unsecured loan, these loans are offered at a higher rate of interest than other regular loans. The interest rate on these loans also depends on the monthly or annual income of the loan applicant. -
No collateral required:
Customers do not need to submit any collateral as security to the lending bank to avail unsecured loans. Your assets are safe with you in case you fail to repay this type of a loan. Due to this unique feature, unsecured loans are becoming increasingly popular among customers. -
Higher the income, the greater the loan amount:
The more the income of the applicant, the higher will be the loan amount that banks offer as an unsecured loan. This means that a customer can avail unsecured loans in proportion to his or her monthly or yearly income. -
Minimum documentation:
The documentation process is very minimal for unsecured loans. Most lenders now allow customers to submit these documents online, and the process has become completely paperless.
Eligibility Criteria
- Applicant should be in a stable job. Regular employment record plays a vital role in making a customer eligible for unsecured loan
- Salaried individuals with a minimum 2 years of professional service or a self-employed person with a minimum 5 years of earning tenure
- Age of the applicant should be above 21 years and below 60 years for salaried borrowers, and between 25 and 65 years for self-employed individuals
- Current financial statements play a crucial role in determining loan eligibility, therefore, should be provided during the loan application process
- Credit history of customers is also taken into account and is instrumental in determining eligibility, rate of interest, and loan amount
- Pending EMIs from other loans are also taken into consideration by the lending bank for determining your loan amount eligibility
Documents Required
Documents required for salaried applicants:
- Duly filled loan application form
- Couple of passport-size photographs of loan borrower
- Identity proof – passport, driving license, voters ID, PAN card (any one proof)
- Proof of residence – utility bill, passport, etc.
- Salary slips for last 3 or last 6 months
Documents required for self-employed applicants:
- Office address proof for self-employed individuals
- Proof of continuity of business
- Processing fee cheque
- Duly filled loan application form
- Couple of passport-size photographs of loan borrower
- Identity proof – passport, driving license, voters ID, PAN card (any one proof)
- Proof of residence – utility bill, passport, etc.
- Salary slips for last 3 or last 6 months
Pros and Cons of Unsecured Loans
Pros
- No risk to existing assets like a home, vehicles, other commercial property, or long-term assets
- Because the borrower doesn’t need to document their assets in an unsecured business loan, some parts of the loan underwriting process may be easier
Cons
- The interest rates will normally be higher than for secured loans
- For those without squeaky clean credit, unsecured business loans can have a particularly high debt load
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