Key points
When you plan on borrowing money from your bank, it is very important to understand the type of loan you are taking out. There are various kinds of loans that exist in the market and having a clear idea about the key differences can help you make the right financial decision.
To be a prudent borrower, it is imperative to know about the different options of loans available to you. There are basically four major categories of loans – secured loan, unsecured loan, term loan, and revolving loan. To make it further easy for you to understand, we have a breakdown of how each one operates with its advantages and disadvantages.
Let’s understand the difference between each of these loans in detail:
Secured Loan
Secured loans have the protection of assets. The items or products bought, such as a car or home are usually used as collateral. The lender will keep the title or deed until the entire loan amount is repaid. Other items such as stocks, personal property, or bonds could also be used to secure a loan.
When a larger amount of money is in question, people usually go for secured loans. A lender will only loan a huge sum when he is promised assured repayment of the entire loan amount. Pledging your house up as collateral is a way to ensure you will do everything to repay the loan. In case, you fail to repay a secured loan, the lender has the full right to sell your collateral to pay off the loan.
Secured loans- advantages
Unsecured Loan
An unsecured loan is a contrast to the secured loan. In this type of loan, the lender stands on the riskier side because there is no asset to recompense in case the borrower is unable to repay the loan. Due to this reason, it charges greater interest rates. In case, you are declined the unsecured credit, you can still apply for secured loans if you have something valuable worthy to be used as collateral.
To obtain a personal loan, you are assessed on the basis of the five C’s of credit:
Secured Loans versus Unsecured Loans
| Secured Loans | Unsecured Loans |
| Protected by assets such as a property in the form of collateral | Assets or collateral are not involved |
| Lower rate of interest | Higher rate of interest |
| If the loan is not paid-off, assets can be sold to recover the loan | There is no asset to recover in case of default |
| Examples: mortgage, auto loan, vehicle loan, home equity line of credit, boat loan | Examples: credit cards, personal lines of credit, personal loans, student loan, overdraft |
Term Loans
The term loan is a loan with a fixed payment schedule that is paid through installments over a specified loan period. The bank can take back the loan if the terms of the loan agreement are violated. This loan is usually taken out for a larger amount and has a longer repayment period.
Examples: education loan, housing loan and car loan
Revolving Loans
A revolving loan is a kind of loan which comes with the flexibility of when you want to make the repayment. The lender informs you the most you can borrow. You have the liberty to borrow money whenever you want it, repay it on your schedule, and then borrow again.
Examples: credit cards, bank overdrafts, and personal lines of credit.
Term Loans versus Revolving Loans
| Feature | Term Loan | Revolving Loan |
| Loam terms | Fixed | Revolving – Short term |
| Rate of Interest | Lower | Higher |
| Type of Interest Rate | Fixed/ variable | Fixed/ variable |
| Repayment flexibility | No | Yes |
| Fixed instalment | Yes | No |
| Recollected on demand | No (unless it is the case of default) | Yes |
| Can you borrow again after payback? | No | Yes |
The Top 5 Personal Loan in Singapore – 2020
If you find yourself in a situation where you need money urgently, you can easily apply for a personal loan. However, before getting a personal loan there are certain requirements that you must fulfill such as minimum annual income, annual interest, and processing fee. To help you sail through smoothly, we have come with the precise list of top 5 best personal loan providers that offer the lowest interest rates:
| Personal Loan | Interest Rate | Processing Fees |
| HSBC Personal Loan | 3.7%-3.8% (EIR from 7%) | None |
| Citibank Quick Cash | From 3.99% (EIR from 7.5%) | None |
| POSB/DBS Personal Loan | From 3.88% (EIR from 7.56%) | 1% |
| Standard Chartered CashOne | 3.88% (EIR from 7.67%) | Waived |
| UOB Personal Loan | 4.25% (EIR from 7.67%) | None |
*Note:- the given information is provided from the source: https://bit.ly/3e8i70S
Interest rates- personalized interest rates after the application approval
EIR- Effective Interest Rate
Processing fee- the main hidden cost of personal loans.
The Bottom Line
Having a proper understanding of loans is an essential prerequisite to attain financial literacy. How and when to borrow money can be a challenge especially when you are new in the world of financial management. Taking debt is one of the highly crucial financial steps thus, knowing the minor but important differences between loans before you finally sign on documents can help you effectively manage debts, save money, improve financial health and enable you to meet financial goals.