Comprehensive Guide To Unsecured Loans In Singapore

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Comprehensive Guide To Unsecured Loans In Singapore

July 20, 2022

Debts are not always bad. In fact, there are good debts and bad debts.

Despite the poor reputation, there is a reason why unsecured loans exist as well. Unsecured loans are a financial tool that is created to help you smoothen your finances. Unsecured loans can be a great way to get the cash you need without risking your assets.

Sometimes, your circumstance does require an unsecured loan. A legal unsecured loan is definitely better than that from loan sharks. But with so many lenders and products available, it can be tough to know where to start. Both banks and licensed moneylenders in Singapore offer unsecured loans.

But first, what exactly is an unsecured loan? How does it compare to a secured one? Read this guide to find out more about unsecured loans and where you can borrow.

What Is an Unsecured Loan?

Loans can be a great way to finance big purchases or consolidate debt, but it’s essential to understand the difference between secured and unsecured loans before you borrow.

A secured loan is backed by collateral, such as a car or house. If you default on the loan, the lender can repossess your collateral to recoup their losses.

An unsecured loan is not backed by any collateral. Therefore, the lender is taking on more risk. The downside of an unsecured loan is that if you default, the lender has no recourse except to take you to court.

Overall, secured loans are less risky for lenders but may have stricter requirements for borrowers, while unsecured loans are more flexible but come with a higher risk of default.

Unsecured loan features:

  • Unsecured loans are typically given to borrowers with good credit, as they are considered higher risk.
  • Unsecured loans can be a good option for borrowers with no assets to use as collateral.
  • You’ll be eligible for a lower sum with higher interest compared to secured loans.

After understanding the unsecured loan meaning, let’s see the two main categories that you need to take note of. They are term loans and revolving loans.

What is a term loan?

A term loan is an unsecured loan that is typically repaid over a fixed period, usually of one to five years. Term loans may also be used for a variety of purposes such as working capital or purchasing equipment or real estate.

It is structured with a fixed interest rate and monthly payments.

Examples of term loans include personal loans and debt consolidation loans.

What is a revolving loan?

A revolving loan allows borrowers to draw on their credit lines, pay back what they owe, and then borrow up to their credit limit. This can be helpful for borrowers who need flexibility or who want to avoid the hassle of reapplying for a new loan every time they need additional funds.

Revolving loans also tend to have lower interest rates than other types of loans, making them an attractive option for borrowers who can manage their debt responsibly.

Revolving loans can also be dangerous if borrowers are not careful. Because borrowers can continue to borrow up to their credit limit, it’s easy to get into a situation where you’re paying interest on a large balance that you may never fully repay.

Examples of revolving loans include credit cards.


5 Common Types of Unsecured Loan

There are a few different types of unsecured loans available in Singapore, each with its features and benefits. Here are some of the most common:

1. Personal Loans

Personal loans are one of the most popular types of unsecured loans in Singapore. They can be used for various purposes, including home renovations, wedding expenses, and more.

One of the main advantages of personal loans is that they usually have lower interest rates than credit cards. Personal loans also tend to have longer repayment periods than other types of loans, making them more affordable.

How much can you borrow for personal loans in Singapore?

  • Between four and ten times your monthly income at banks
  • Up to six times your monthly income at a licensed moneylender
  • Capped at $250,000

Eligibility conditions for personal loans:

  • Minimum age: 21 years old
  • Maximum age: 60-65 years old (at some banks)
  • Credit score: Banks usually prefer a stellar credit score, though licensed moneylenders are more lenient.

Best for: Those who want fixed installments over a longer repayment period

PROS:

  • Lower interest rates than credit cards
  • Longer repayment periods
  • Can be used for anything you want

CONS:

  • Difficult to qualify at banks if you have bad credit or low income

2. Credit Card Installment Plans

Credit card installment plans are unsecured loans offered by some credit card issuers in Singapore. They are provided by banks such as DBS, UOB, OCBC, Standard Chartered, Maybank and more. They can be used for several reasons, including large purchases.

When will you use a credit card installment plan? You’re tired and achy from working on the computer eight hours per day. The next thing you know, you spot a zero-gravity massage chair on sale for $5,000. You decide to buy it using your credit card and opt for the 12-month installment plan at 0% interest. A credit card allows you to buy an item that you don’t have ready cash for.

A typical card would have a high interest rate of 25%/year. Once you’re not careful, you could end up in bad debt.

Comparatively, with a credit card installment plan, you can spread out your payments over a longer period (in this case, 12 months) at 0% interest.

Note: Your credit card limit has to be equal to or higher than your new purchase.

Let’s say your credit card’s limit is $6,000. If you use $5,000 for that massage chair, your new cap will be $1,000. So you won’t be able to charge more than $1,000 on your credit card until you’ve repaid your installment loan.

Eligibility conditions:

  • Minimum sums, specific terms and eligible products differ depending on your card provider
  • The minimum age is usually 21 years old, and there is typically no citizenship-related restriction.

Best for: Purchasing big-ticket items

PROS:

  • Zero interest rates
  • Flexible repayment periods

CONS:

  • Will reduce your credit limit
  • Could borrow more with a personal loan

3. Balance Transfer

A balance transfer plan is an unsecured loan that allows you to transfer your outstanding credit card balances from one or more credit cards to a new card with a lower interest rate. Therefore, you save on interest and pay down your debt more quickly.

What is an example of a balance transfer? You have $2,000 in credit card debt with an interest rate of 25%. You transfer this balance to a new credit card with a 0% interest rate for 12 months. Therefore, you’ll save $500 in interest over the year and can use that money to pay down your debt more quickly. Balance transfers typically have a one-time fee of around 3%. So in our example, you would have to pay a $60 fee to transfer your balance.

Note: Most balance transfer deals come with an introductory 0% interest rate, lasting for six to 12 months. After that, the interest rate will revert to the standard rate, usually 25% p.a.

Eligibility conditions:

  • Minimum sums and specific terms differ depending on your bank.
  • The minimum age is usually 21 years old, and there is typically no citizenship-related restriction.

Best for: Those who want to save on interest and pay down debt quickly.

PROS:

  • Can save on interest
  • Can help you pay down debt more quickly

CONS:

  • One-time fee, which can be around 3%
  • After the introductory 0% interest rate period ends, the standard rate (usually 25% p.a.) will apply

4. Line of Credit

A line of credit is an unsecured loan that gives you a set amount of money you can borrow as needed. You only pay interest on the amount you borrow and can repay the debt over time.

Let’s take an example. You have a $10,000 line of credit. You use $5,000 of it to pay for home repairs. You will only be charged interest on the $5,000 you borrowed, and you can repay that amount over time. A line of credit can be a good option if you need money for unexpected expenses or want the flexibility to borrow as needed.

Remember that the interest rate on a line of credit is usually higher than the interest rate on a personal loan.
Eligibility conditions: Minimum sums and specific terms differ depending on your bank. The minimum age is usually 21 years old, and there is typically no citizenship-related restriction.

Best for: Those who want to save on interest and pay down debt quickly.

PROS:

  • Only pay interest on the amount you borrow
  • Can repay the debt over time

CONS:

  • Interest rates are usually higher than personal loan rates
  • After the introductory 0% interest rate period ends, the standard rate (usually 25% p.a.) will apply

5. Debt Consolidation Plan

If you have multiple debts with high interest rates, you may save money by consolidating your debts into one loan with a lower interest rate. Therefore, you get out of debt more quickly and save on interest payments.

Let’s say you have the following debts:

  • $5,000 on a credit card with an interest rate of 25%
  • $3,000 on a personal loan with an interest rate of 10%
  • $2,000 in medical bills with an interest rate of 5%

You consolidate these debts into one $10,000 loan with an interest rate of 7% and a five-year tenure. Therefore, you pay more reasonable installments that fit seamlessly in your budget and have just one due date per month. This is a good solution if your income is not high.

Eligibility conditions:

  • Income, credit score, and specific terms differ depending on your bank/ licensed moneylender.
  • The minimum age is usually 21 years old, and there is typically no citizenship-related restriction.

Best for: Those who have multiple debts with high interest rates

PROS:

  • Lower interest rate
  • Lower monthly installments
  • One monthly due date only
  • Become debt-free faster

CONS:

  • May not qualify if you have bad credit
  • May include origination fees

Unsecured loans can be a great way to finance large purchases or consolidate multiple debts. But it’s important to shop around and compare interest rates, fees, and repayment terms before you apply.

A fixed unsecured loan will definitely be more manageable than a credit card debt with compounding interest rates. To find an unsecured loan that suits you, click here.