A secured loan is a line of credit that is guaranteed against an asset you own or buy with the loan. You can usually apply for an amount up to S$200,000 for terms up to seven years, although the line of credit can be ongoing.
The security can come in the form of a number of different items, including a car, equity in your home, high-priced items such as jewellery or monetary accounts such as term deposits.
Risk of losing your collateral. When you default on a loan, the lender may seize the asset that the loan was secured with. For secured loans such as home loans or car loans, you could lose your home or car if you pledge those assets as your collateral.
Lower interest rates. Since your loan is secured by an asset, the lender takes on much lower risk and can provide the funds at a lower rate.
No risk of losing your collateral. When you default on your unsecured loan, there won’t be any seizure of your personal assets. However, take note that defaulting on an unsecured loan can seriously worsen your credit history and make you ineligible for credit in the future.
Higher interest rates. As your loan is not secured by any asset, lenders often charge a higher rate for the greater risk they take on, which can make loan repayments much more expensive.
Is a secured loan the right option for you?
It’s important to determine whether any type of financial product is right for you before you apply. When it comes to secured personal loans, here are three points to keep in mind:
You can manage your repayments. If you find yourself unable to repay your secured loan, the lender is able to repossess the asset you offered as a guarantee to cover its losses.
You have an asset to guarantee or are looking to buy one. Lenders will require that you either be looking to buy an asset with your loan (such as a car or home renovations) or that you already have an asset that meets its criteria.
You meet the requirements set by the lender. Lenders will have requirements for the guaranteed asset, such as its age or value. For instance, if you’re using a vehicle as security, it may need to be under a certain age, or if you are using a term deposit, you may need to have a certain amount in the account.
Pros and cons of secured loans
Lower rate. These loans are less of a risk for the lender, so they come with lower interest rates.
Flexible. Unlike car loans, where you have to purchase the vehicle you’re securing the loan for, you can generally purchase whatever you need to with a secured personal loan as long as the amount doesn’t exceed your secured asset’s value.
Can help you get approved. Offering an asset to secure a personal loan can help you get approved for loans you may not previously have been. This is because the loan is deemed less risky for a lender to take on when there is an asset attached to it.
Risk your asset. When you take out a secured loan you are “guaranteeing” your loan with it. While this gives you lower rates, it also means you can lose it if you default on the loan.
Loan amount tied to the value of your assets. When you attach your asset to a secured loan it needs to be valued. This value will then be used to determine the loan amount you are offered.
What assets can you secure to a personal loan?
There’s a range of different secured loans available, but you will find lenders who let you use the following assets as security for your loan:
New car. If you’re buying a new car or if you have a car that is less than two years old, you can generally use it as a guarantee for a secured loan.
Used car. Lenders will also let you purchase a used car up to 10 years old with a secured loan. However, the car may need to be of a certain condition.
Equity in your home. If you own a mortgaged property, you can draw against any equity you have in the property to finance a purchase. Common uses for home equity loans are home renovations. You can find out if a home equity loan is right for you.
High-cost assets. Some lenders are more flexible with the assets they let you use. If you own expensive jewellery, fine art, precious metals, prestige cars or even some antiques, you can secure it against your loan.
Term deposits. This is a more common type of loan available from some banks and credit unions. How much you have available in your term deposit is how much you’re able to borrow with that same institution. The amount of your term deposit works as the security in case you default on the loan.
Secured loan options
You have a few options when it comes to secured personal loans:
Car loans. These secured loans can be for new or used cars. You can find car loans from most banks and credit unions, as well as dealerships and standalone car loan lenders. Rates can range from 2% p.a. for dealership finance (low because of the balloon payment at the end of the term) to between 5 and 14% p.a. for a bank car loan.
Home equity loans. If you’re looking to renovate, invest in property, go on a holiday or buy a new car, you can consider a home equity loan. Also called a line of credit as it can be drawn on continually based on the equity held in your property, so this is a flexible way to access funds.
Term deposit secured loans. This is a loan offered by banks and credit unions to customers who hold terms deposits with them. You’re able to borrow as much as you hold in your term deposit, with the term deposit acting as the security.
Personal asset secured loans. High-priced assets such as boats, motorbikes and jewellery are accepted by some lenders as a guarantee. Your item or collection of items is valued and then used as security, allowing you to take out the loan you need. You generally won’t find these loans at major banks.
How to compare secured loans
Loan amounts. Find out what loan amounts the lender is offering and if it will match your loan purpose.
Loan terms. Loans are generally available for terms of between one and seven years. Loan terms may only extend up to five years for fixed-rate loans or peer-to-peer (P2P) loans, so make sure you find a loan with terms that meet your needs.
Assets you can secure to the loan. Lenders have different requirements when it comes to secured loans. You may not be able to secure the asset you are planning to, so check this before you apply.
Fees. Check upfront fees such as application or establishment fees as well as ongoing fees such as annual or monthly fees. These will add to your costs for the loan.
Interest rate. How competitive is the interest rate? Compare the rate to other lenders and make sure to check the effective interest rate which will give you a better idea of the true cost of the loan.
Repayment flexibility. Are you able to repay the loan early without penalty? Can you make additional repayments without being charged? Check this before you apply.
Before applying for any type of secured loan, it’s important to establish whether you can afford the repayments. If you default on the loan, the asset you’ve used as the guarantee can be seized by the lender and sold to cover the loss. Comparing lenders to find the most competitive options in terms of terms, rates and fees will help you find the right option for your budget and needs. Ensure you’ve conducted thorough research before submitting your application.
Frequently asked questions
A car loan is used specifically to purchase a vehicle. The loan is still secured, but the difference is that the loan amount is restricted to buying the vehicle that will be used as security for the loan. A secured loan is where you already own the asset, which can be a car or equity or in your home or something else, and you use the loan amount for a different purpose.
The lender is able to seize and sell your asset to recoup its losses.
Because you have attached an asset to the loan, the lender is taking on less of a risk. If you default on the loan, they have a right to the asset you attached to the loan. In exchange for you attaching the asset to the loan, you get a lower interest rate.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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