Posted by In getting business term loans in Singapore for the expansion of your enterprise or a new venture, one of the things you should know is the difference between an unsecured and secured loan. The distinction is pretty straightforward. A secured loan requires collateral and an unsecured does not. However, there’s definitely more to it than that, and understanding the concept further can guide you to the right decision.
Here are the pros and cons of secured and unsecured loans that may or may not benefit you, depending on your business needs.
Collateral
A collateral is any piece of priced property, like a house, car, land, equipment, and others, that you will have to surrender to the lender in case you are unable to pay the loan. Secured loans require that you have collateral as a form of guarantee that you will repay the debt. Unsecured loans, on the other hand, do not, which can be an advantage as you don’t have to risk losing your properties. However, this has a couple of effects on the extent of the loan and payment terms, which are further discussed below.
Interest rate
Unsecured business term loans don’t require you to have collateral, but in exchange for this, the interest rate is usually higher than secured loans. This is the price you pay for not having to risk losing your properties as an assurance to repay. Secured loans are less risky for the lender since there’s still a guaranteed return as collateral in case the borrower cannot abide by the loan terms. In return, they grant you lowered interest rates so you have less to dish out in the future.
Monthly payment
Like interest rates, the amount that you have to pay every month on unsecured loans could be higher than on secured loans. Without collateral, the lender faces more risk and, therefore, there’s more pressure to secure the money back. As a result, monthly payments are increased to ensure that the loan is recovered as much as possible.
Repayment terms
Repayment terms are usually longer for secured loans because of the security provided by the collateral. Who wants to lose their property, right? No one. Hence, borrowers are more driven to repay. It can be an advantage but also a disadvantage, depending on your situation. On the flip side, unsecured loans take shorter repayment terms as there’s less repayment assurance in the absence of collateral.
Loan amount
You avoid the risk of losing a valued property with unsecured loans; however, you can’t borrow as much with unsecured terms as with secured terms. Naturally, there’s more trust in secured loans since collateral guarantees return so the lender is more amenable to loaning out higher sums of money.
Difficulty getting
To be approved for a secured loan, you will have to pledge properties that could, or could not, be seized by the lender, depending on your conformity with the term loan. For unsecured loans, you need a good credit score, history and reputation. Assess your needs and situation so you get the appropriate business term loans in Singapore.
Flexibility of use
Secured loans are more rigid about where the money goes so if the loan is for a house, it should all go to purchasing a house. On the other hand, unsecured loans are smaller, typically easier to get and more flexible in use.
Secured or unsecured loans?
There’s no bad loan based just on the merits of a secured or unsecured loan. The right term depends on you and your business needs. A bad loan is a misused loan. Make sure that you maintain a firm aim towards your goal when you decide to get business term loans in Singapore so your business fully benefits from them.