A Comprehensive Guide on Unsecured Personal Loans

An unsecured personal loan allows you to borrow money without pledging collateral, such as a car or home, making it different from secured loans. Instead of relying on assets, lenders evaluate factors like your credit history, income, and outstanding debts to determine your eligibility for this personal loan.

Additionally, unlike secured loans, failing to repay an unsecured loan won’t result in repossession of your property. However, defaulting can significantly impact your credit score.

These loans can be used for various financial needs, but choosing the right one ensures it supports your financial goals without adding unnecessary debt. If you're considering an unsecured loan, understanding how it works, its advantages, and potential drawbacks can help you make an informed decision.

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In Singapore, borrowing limits for unsecured loans are determined by an individual's annual income. To qualify, you must earn at least S$20,000 per year, with different income brackets dictating the maximum loan amount allowed by financial institutions. Understanding these limits can help you make informed borrowing decisions:

• Annual income S$20,000 – S$30,000: Maximum loan amount capped at two months' worth of income.

• Annual income S$30,000 – S$120,000: Maximum loan amount capped at four months' worth of income.

• Annual Income S$120,000 or more: No regulatory borrowing limit.

The Effective Interest Rate (EIR) for unsecured loans could be as low as 3.63% per annum, depending on the loan type. The EIR reflects the total cost of borrowing, incorporating both interest rates and additional charges like processing or origination fees.

Additionally, unsecured loans come with fixed repayment terms, requiring borrowers to repay the principal and interest within a specified period.

Most personal loans fall under the category of unsecured loans, meaning they don’t require collateral. While some lenders may offer secured personal loans backed by assets like a car or savings account, these are less common.

Since unsecured loans don’t have collateral, lenders consider them riskier than secured loans. If a borrower defaults, the lender can’t claim assets to recover losses. As a result, unsecured loans typically have higher interest rates and stricter borrowing requirements compared to secured loans.

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One advantage of unsecured loans is that the approval process is often faster, as lenders don’t need to evaluate collateral before making a decision.

>> MORE: A complete guide to unsecured loans in Singapore

Lenders may advertise unsecured personal loans for specific needs, but in reality, they can be used for almost any type of expense. Some of the most common ways borrowers can use them include:

• Financing long-term financial goals: Unsecured loans can help improve your financial health when used strategically. For instance, a home improvement loan allows you to renovate your property and potentially increase its value. Similarly, a debt consolidation loan with a lower interest rate can help simplify payments and reduce the overall cost of existing debt.

• Covering lifestyle expenses: Some borrowers use unsecured loans for discretionary spending, such as wedding loans or vacation loans. While this is an option, it's generally recommended to use savings instead. If you do need financing, compare different options and choose a loan only if it offers the lowest cost.

• Handling unexpected costs: Unsecured personal loans may also be used for emergency expenses, including medical bills or urgent repairs. However, it's best to explore cheaper alternatives first, such as medical financing plans or community assistance programmes. If a loan is necessary, look for one with quick approval, competitive rates, and minimal fees to avoid unnecessary financial strain.

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If you're looking for an unsecured personal loan, you can explore options from online lenders, credit unions, and banks. Each lender type has different terms, interest rates, and eligibility requirements, so it's important to compare your choices carefully.

Before applying, consider factors such as interest rates, monthly payments, and loan terms. Using a personal loan calculator can help estimate your repayment costs. 

Some lenders also offer a pre-qualification process, particularly if you’re planning to get a home loan. This helps you check potential loan offers without affecting your credit score.

Online lenders

With the rise of digital finance, online lenders such as SingFinance have become a popular alternative. These lenders typically offer faster loan approvals, more flexible requirements, and a fully online application process. However, borrowers should carefully compare interest rates, processing fees, and repayment terms to avoid high costs.

Credit unions

Credit unions are member-owned financial cooperatives that provide personal loans to their members, often at lower interest rates than traditional banks. They also tend to offer personalised service and flexible repayment terms. Examples of credit unions in Singapore include the Singapore Police Co-operative Credit Union.

Banks

Many major banks in Singapore, such as DBS, OCBC, UOB, HSBC, and Standard Chartered, offer personal loans with competitive interest rates and reliable customer support. However, bank loans typically have stricter eligibility requirements, such as higher minimum income thresholds and strong credit scores.

>> MORE: How much loan can you get from a bank in Singapore?

When evaluating a loan application, lenders assess various factors to determine your eligibility and interest rate. These include the following:

Credit score and history: Your credit score plays a crucial role in the approval process. Borrowers with excellent credit typically qualify for the lowest interest rates and higher loan amounts, while those with poor credit may face higher rates or difficulty securing a loan. Additionally, lenders often require a minimum of two years of credit history, though a longer history can improve your chances.

>> MORE: Things to look out for when applying for a personal loan for the first time 

Debt-asset ratio: Lenders also evaluate your debt-asset ratio—the percentage of your monthly income that goes toward existing debt payments. A high debt-asset ratio indicates a heavy debt burden, which may reduce your chances of approval.

>>More: Calculate your debt-asset ratio

Bank account activity: Some lenders review your bank account transactions to assess your income flow and spending habits. This helps them determine if you can comfortably afford loan repayments without financial strain.

If you're considering an unsecured personal loan, following these steps can help you secure the best deal while minimising financial risks.

1. Review your credit report. Check your credit report for any errors, such as incorrectly reported late payments or duplicate debts. Fixing these mistakes can improve your credit score and boost your chances of getting better loan terms.
2. Explore pre-qualification options. If you’re planning to get a home loan, consider pre-qualifying for loans. Some lenders offer pre-qualification, allowing you to check potential loan terms without affecting your credit score. This process gives you an estimate of the loan amount, interest rate, and repayment terms you might qualify for.
3. Compare loan offers. Once you have narrowed down your options, evaluate them to find the most favourable terms. The loan with the lowest EIR is typically the most cost-effective choice.
4. Submit a loan application. When you're ready to apply, gather necessary documents like proof of income and bank statements. Submitting a formal application will trigger a hard credit inquiry, which may temporarily lower your credit score. Lenders usually process applications within a few days and, if approved, disburse funds within a week.

>> More: How to start your loan application

Failing to repay a loan can have lasting financial and personal repercussions. One major consequence is difficulty in securing employment. In some cases, employers may request to view your credit report. When they see a history of loan defaults, this could be a sign of financial irresponsibility, which is particularly important in industries like finance. 

Additionally, banks may have the right to seize funds from your account to cover unpaid debts, depending on the terms of your loan agreement. 

Another risk is legal action, as lenders may sue borrowers who have the means to repay but fail to do so.

Lastly, a poor credit score resulting from missed payments can limit access to essential loans, such as home or education loans, affecting long-term financial stability. 

While defaulting may seem like an immediate relief, the long-term consequences can be severe.