In general, there are two kinds of loans Philippines’ consumers can avail of: secured or unsecured. All other kinds of loans fall under these two. For example, home loans and auto loans are usually secured; on the other hand, credit cards and personal loans are unsecured.
The primary difference between secured and unsecured loans is simple. The former means you have to put up a collateral, while the latter doesn’t. However, there are many more fine details that you need to keep in mind about these two types of loans. Knowing about these can help you plan your finances better:
Secured Loans: Easier to Get Approved
It’s much safer for banks and other lenders to approve secured loans. In case you aren’t able to pay your dues, they won’t suffer from huge financial losses because they’re able to repossess the asset that you put up as collateral.
Thus, you don’t necessarily have to have a prior relationship with the bank or have a long credit history. As long as you meet the requirements, there’s a very good chance that your application for a secured loan will be approved.
Secured Loans: Low Interest
One of the biggest concerns that many Filipinos have about loans is the interest. Depending on the amount, some loans can have rates of up to 5%. This isn’t the case with secured loans, however. Some banks have secured loan products with interest rates of less than 1% and up to a ceiling of only 3%.
Again, this is because of the lower risk associated with secured loans. Lenders feel more confident about charging lower interest, simply because you have essentially paid a security deposit (in the form of collateral).
Secured Loans: You Can Borrow Bigger Amounts
If you need to borrow a bigger amount, say for a house or a car, your best bet is a secured loan. This is yet another benefit that stems from the asset that you’ve pledged as collateral.
Secured Loans: Longer Repayment Periods
Because you’re able to borrow larger amounts of money through secured loans, banks and other lenders typically allow you to pay over a longer period. In fact, some banks even have payment terms that last up to 240 months or 20 years!
This can be either good or bad, depending on your situation. Do note that like any other loans, a longer payment period means you’ll pay lower monthly amortizations but you tend to pay higher interest over time.
Secured Loans: You May Lose Your Property
The downside of secured loans is the same reason behind all of the benefits mentioned above: the property you put up as collateral. If you aren’t able to pay on time, the lender can seize the collateral in exchange. Many of the vehicles and houses you see being auctioned or sold by banks are often acquired assets from unsecured loans.
Still, this doesn’t mean that you shouldn’t consider getting a secured loan if you need one. The key is to plan your finances accordingly so that you’re able to make consistent payments.
Unsecured Loans: Good for Short-Term Needs
If you need money to address short-term needs, such as an urgent bill or loan consolidation, an unsecured loan is the better option. If you have a small business, you can also apply for unsecured loans so that they can inject some capital during lean periods.
In short, an unsecured loan can help you strengthen your cash flow by giving you access to the money that you need but currently don’t have.
Unsecured Loans: Faster Approval and Disbursement
Unsecured loans usually have faster approval. Depending on the amount you want to borrow and your relationship with the bank, your loan application may be approved within hours up to a maximum of 2 to 3 business days. Sometimes, if you’re a customer in good standing, the bank may even extend a loan offer to you
Secured loans usually take a little longer to process because the lender still has to evaluate the value of the collateral.
Unsecured Loans: More Flexible Payment Terms
With regards to payments, lenders offer flexible terms for unsecured loans. Should you have any trouble in the future, you may also be given restructuring options or even a payment holiday. Meanwhile, if you’re consistently making your payments on time, you may even be allowed to top-up or make additional loans even if you haven’t finished paying the first loan.
Unsecured Loans: Lower Loan Amounts
Most lenders usually offer unsecured loans (e.g., personal loans) at lower amounts like Php 10,000 to Php 30,000. Again, this is because unsecured loans are often availed to fulfill short-term needs. However, do note that some banks may offer up to Php 300,000 up to a maximum of Php 2 million, depending on your credit standing and relationship with the bank.
Unsecured Loans: High Interest Rates
In order to protect their investment, banks and other lending institutions charge higher interest rates for unsecured loans. This is because, unlike secured loans, there’s no collateral involved. Thus, if you aren’t able to pay, they can lose money. Just think of the interest charges as insurance so that the lender can protect their investment.
When it comes to money matters, it pays to be informed. Hopefully, this quick list has helped you achieve that goal with regards to secured and unsecured loans.
