Understanding Unsecured Loans
With the rapidly changing financial industry and laws imposed on it, Monetary Authority of Singapore (MAS) stepped in early this year to aid borrowers landing in excessive unsecured debts. A new rule of capping the unsecured loans limit was imposed.
The new rule prevents borrowers from further getting any unsecured loans credit from financial institutions should the borrower have unsecured debts that exceed six times his or her monthly income, financial institutions will not be allowed to provide any increase in credit limit or additional credit that will cause a borrower’s credit limit to exceed 12 times their monthly income.
The rule comes in a move to reduce the escalating debt problems in Singapore and led to a slew of changes in how unsecured loans work.
Secured Loans vs Unsecured Loans. What are they?
Loans are secured if and only when borrowers pledge their assets to the lender as a form of collateral for the loan. Should their loan fall through when repayments are not met, the lender has the authority to sell the assets to recover the money due. If the money recovered is not enough, borrowers are liable to make up the shortfall.
Unlike secured loans, for unsecured loan borrowers do not provide or pledge any form of assets to the lender as collateral. Therefore, interest rates for such loans tend to be higher as financial institutions or lending companies take on more risk.
Past financial records, monthly salaries, unsecured loans debt are taken into consideration whenever an unsecured loan is issued. Personal loans, credit cards are a form of unsecured loans.
What next? Afterthoughts of loans
Regardless of loan types, do be clear on the loan you are getting. The goal is to opt for a loan that best fits your needs and minimising the interest cost whenever possible. Managing your financial wealth is of utmost importance as you would not want to end in a spiralling debt cycle.
Always be clear on your loans, ask the loan officer during your session. When in doubt, do your due research or seek another financial institution.