Understanding the Different Types of Collateral you can use for a Personal Loan

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Hailey Ang

Updated on: January 10, 2023

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Understanding the Different Types of Collateral You Can Use for a Personal Loan

A collateral for a secured loan is like a wedding ring. The ring represents your promises of love and faithfulness to your spouse. The collateral represents the promise you will repay the loan.

And seeing that your lender has extra security, they will lend you more money at a lower interest rate.

Depending on the type of collateral you’re using, of course.

When taking out a personal loan in Singapore, you can use several types of collateral to secure it. These include your home, vehicle, and other valuable possessions.

We will discuss them below, with specific calculations for best and worst-case scenarios. Keep reading below.

Table of Contents

1. Use Your Property As Collateral

Your home is the most common form of collateral used for personal loans in Singapore. Using your house as security gives the lender more assurance that they will be repaid since they can easily repossess and resell the property if necessary.

It also allows you to borrow more money than other forms of security since it’s worth more than other items.

Let’s look at the math:

First, unsecured personal loans only allow you to borrow up to $250,000. And that’s within the limit of:

  • Six times your monthly income: For licensed moneylenders
  • Ten times your monthly income: For banks

That means a $4,000/month salary can earn you a maximum $40,000 loan.

Side note: Sometimes, you may not even get that amount. For example, you may:

  • Earn less than $20,000: The maximum loan amount is $500 to $3,000.
  • Have preexisting debt: Suppose your accumulating loans are close to the 55% Total Debt Servicing Ratio (TDSR) limit. In this case, lenders may be wary of giving you another unsecured loan.

Here’s how much you can get by using your home as collateral. If your property is worth $800,000 and you still have an outstanding $200,000 loan:

  • The loan-to-value (LTV) ratio is 25%.
  • Your equity is 75% (you basically own three-quarters of the house because you’ve repaid 75% of the loan).

Now let’s say you find a lender that agrees to a 75% LTV limit. 75% out of $400,000 is $600,000. Subtract the $200,000 loan you already have from this amount.

That means you can borrow another $400,000.

Remember: The lower your outstanding home loan, the more you can borrow based on your home’s value – and vice-versa.

Best case scenario:

Considering a 15-year tenure and a 2.37% per year effective interest rate, you get:

  • Monthly installment: $2,661
  • Total loan cost: $478,980
  • Total interest: $78,980
1PNG 2

According to CitiBank mortgage loan calculator

*Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability.

Worst case scenario:

You lose an $800,000 home for $400,000. That’s not an ideal situation. So, if you have reason to believe you cannot reimburse this type of equity home loan, consider the options below:

2. Use Your Car As Collateral

Another type of collateral used on personal loans in Singapore is a car or other motor vehicle. This can assure lenders that they will get their money back should you default on your loan.

Consider:

  • Your car is worth $100,000, and you have paid it in full.
  • The maximum loan-to-value ratio (LTV) for car loans in Singapore is 60% for cars that cost more than $20,000.

Therefore, the maximum secured loan you can get is $60,000.

Now, let’s take the worst-case scenario and assume you cannot repay this loan.

Does that mean you are losing a $100,000 car for $60,000?

The answer is no. Your car depreciates between 15% and 25% percent each year. That means your car will only cost 60% of its current value in five years.

And 60% of $100,000 is precisely $60,000.

Suppose you take $60,000 for seven years with a 5% interest rate. Your monthly payment is $965.

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*Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability.

So, after five years of your loan, you will have:

  • Received $60,000
  • Paid back $57,900

So, your inability to reimburse the loan means losing a car worth a maximum of $60,000 for $2,100.

But what if you can reimburse the loan?

  • Your current installment is $965.
  • The total interest repaid over 7 years is $21,060, at a 5% annual rate.

An unsecured loan has a lower tenure, though. That translates into a higher installment.

Banks in Singapore:

  • Your monthly installment for the corresponding unsecured loan would be $1,860.67.
  • The total interest repaid over ten years would climb to $7,584.

A money lender with a 2% monthly interest:

  • Monthly installment: $2,353.97
  • Total interest: $24,742.92

*Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability.

Notice that the two unsecured loans have similar installments. However, it’s much more challenging to qualify for a bank loan of this size, especially if you don’t have a good credit score.

3. Use Other Assets As Collateral

Other valuable possessions can also be used as collateral on personal loans. Items such as jewellery, antiques, and other collectibles can all serve as security for a loan.

While they may not be worth as much as your home or car, they are still considered assets that the lender can reclaim if needed.

Consider this example:

Let’s assume you have made some poor decisions in the past, which have lowered your credit rating to 1760. According to Credit Bureau Singapore, that puts you in the FF risk grade.

That rating means you cannot obtain convenient loan conditions, although your current income is $5,000/month, and you have no other debt. As such, your best offer is from a licensed moneylender:

  • $3,000
  • 3% interest rate
  • 12-month tenure

That translates into:

  • Monthly payment: $301.39
  • Total loan cost: $3,616.68
  • Total interest: $616.68
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*Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability.

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Source

Enter your old Rolex worth $50,000. Your new offer for this secure loan is:

  • $40,000
  • 1% monthly interest
  • 3-year tenure

Therefore:

  • Monthly installment: $1,328.57
  • Total loan cost: $47,828.52
  • Total interest: $7,828.52

*Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability.

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However, the $1,328.57 monthly installment represents just 26.57% of your earnings. If you manage your budget well, you can fit this payment seamlessly.

  • Best case scenario: You earn $29,788.16 more with a secured loan (we assume that the total interest consists as loss in both cases). And you can solve whatever need you have seamlessly, which is arguably priceless.
  • Worst-case scenario: If you default on your secured loan, you lose $17,828.52 ($10,000 the difference in your Rolex’s price + the total loan interest).

What Collateral Should You Use?

This article has taken you through various best-case and worst-case scenarios depending on the type of collateral you take. Each has its pros and cons:

A home equity loan gets you the largest amount, but it’s also the riskiest. Not just because your home is the most expensive but also because losing your home puts you at risk the most.

A secured loan using your other assets implies the least risk to your livelihood. But depending on the total value of your assets, this strategy can earn you the smallest loan.

That said, taking a secured loan entails lots of planning and researching.

You must compare different loan offers based on different collaterals you might use. You can do the math yourself or contact a professional to help you with these calculations.

Loanstreet can assist you with personalised quotes from banks and licensed moneylenders in Singapore. That way, you can do your research and pick the best option.

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