Published: September 21, 2020 | Updated: September 29, 2020 | Posted by: Moneymax | Personal Loan
Do you need a loan but don’t have collateral? Unsecured loans may be a good option. However, before you jump the gun and rush off to the nearest lender, you need to know more about this type of loan.
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Unsecured loans are a type of personal loan issued by commercial banks and private lenders that require no collateral, meaning there’s no need to pledge a valuable property you own. Examples of such properties are your car, house and/or lot, or even an ATM card. Most lenders in the Philippines offer unsecured loans without collateral up to PHP 1 million payable in one to three years.
If you need money but don’t want to pledge a collateral, then an unsecured loan might be a good option for you. An unsecured loan is also a viable option if you need to fund an emergency expense. However, make sure that you really need a loan before applying for one. Unlike secured loans, unsecured loans have higher interest charges and loan fees.
Read more: Should I Borrow Money from Private Lenders?
A secured loan is generally backed by an asset, or “collateral.” It includes a clause that the lending facility or bank can repossess the asset in question should you fail to pay back the loan on time. Home loans and car loans are common examples of secured loans.
When you default on a secured loan, you will not only lose the asset that you put up as collateral, but you may also end up paying more money than originally stipulated in the loan. If the asset is not enough to cover the loan amount, you will be liable for the remaining amount.
Unsecured loans, on the other hand, do not require a collateral. Common examples of unsecured loans are personal loans, student loans, and salary loans, including the ones provided by the Social Security System or SSS.
As compared to secured loans, unsecured loans have smaller loanable amounts, as there are no assets to be seized. Credit cards are also an example of an unsecured loan.
The following are just some of the different kinds of unsecured loans in the Philippines:
Credit cards are one of the most common unsecured loans in the market. Most lenders will look into your credit score and household income to determine if you can afford the monthly payments for a credit card. Unsecured credit cards generally have lower interest rates compared to secured ones, which may require a cash deposit as part of the application process.
Banks and other lending institutions in the Philippines offer personal loans. The requirements for this type of unsecured loan may vary depending on the lender. In general, you need to have a good credit score, a credit card and a stable source of income to prove that you can afford the monthly repayments.
Also known as payday loans, this type of unsecured loan is based on the amount you can borrow on the gross salary you will receive per cut-off. Salary loans have smaller loanable amounts as compared to personal loans and credit cards.
If you fail to pay off an unsecured loan, you won’t risk losing your personal or business asset that you declared as collateral.
This is the biggest advantage of unsecured loans over secured loans. If your loan is secured, the lender can repossess your car or foreclose your home to recover some of its losses from your unpaid loan. You won’t worry about repossession or foreclosure with an unsecured loan if you’re in a tight spot that makes it hard to repay a loan on time.
Let’s say you’re choosing between auto loans and personal loans to purchase a new car. With an auto loan, the loaned car becomes your collateral, and the bank can take it back when you stop making payments. On the other hand, defaulting on a no-collateral personal loan won’t end up in a car repossession.
If you declare collateral on your loan application, it will have to undergo an appraisal first to estimate its value. That involves more time and paperwork, as the lender uses the value of the collateral as a basis for deciding whether to approve a secured loan or not and how much you can borrow (The loan amount is a percentage of the collateral’s appraised value).
In contrast, an unsecured loan eliminates the need for a property appraisal. This is why unsecured loan providers, especially online lenders, can release loan proceeds within only 24 hours or a few days.
Secured loans such as housing loans and auto loans require a down payment of at least 20% of the property’s market value. That isn’t the case with unsecured loans, making them ideal for meeting immediate cash needs.
Unsecured loans in the Philippines are approved based on a borrower’s credit history, credit score, and income stability. This makes getting a no-collateral loan harder than a secured loan in two ways.
First, borrowers have to prove their ability to repay a loan by submitting several financial documents required by the lender. The entire process—from obtaining all requirements and submitting them to scrutinizing and evaluating the requirements—can take so much time. No matter how much effort you’ve put into preparing all the requirements, your loan application may still be denied.
Second, borrowers with a good credit score have better chances of an unsecured loan approval than those with a poor score or no credit history. If you have unpaid loans, bad credit score, and credit card bills, lenders will find that out and reject your loan application.
The cost of borrowing is higher with unsecured loans. Their higher interest rates at shorter repayment periods raise the monthly loan repayments. It only makes sense. Without any collateral, lenders are at risk of incurring losses if a borrower defaults on an unsecured loan. Charging higher interest rates is a way to offset such a risk.
This becomes a huge setback when you don’t have enough cash flow and can’t afford your monthly repayments anymore. Once you stop repaying a loan, you’ll incur debt and a lower credit score. Also, it will be harder to get an approval for loans and credit cards in the future.
Another way personal loan providers reduce the risk of an unsecured loan default is lending smaller amounts, especially to borrowers with a low credit score. Thus, even if you’re approved for a personal loan without collateral, the loan amount may not be enough to cover your specific financial need.
Lenders will evaluate the following when reviewing an unsecured loan application:
Lenders may ask for your credit report to see how you handled your past loans and other debts. In general, they want to see that you are responsible for repayments. Consider paying off existing debts before applying for any kind of loan to improve your chances of approval.
They also want to make sure that you can meet your financial obligations, including loan payments. Your lender will ask you to submit proof of income, including payslips and Certificate of Employment. These requirements show that your source of income is stable and that you have monthly funds to cover your loan repayments.
Once lenders see your current and previous debts as well as your income, they will measure your ability to repay a loan using debt-to-income ratio. To get this ratio, simply add all your monthly debt payments and divide the number by your gross monthly income.
For example, if you have a total monthly debt payment of PHP 20,000 and your gross monthly income is PHP 55,000 your DTI is 0.36 or 36%. The lower your DTI is, the better. DTI requirements may vary depending on the lender.
Here are some of the lenders that offer unsecured loans in the country:
Blend.ph offers unsecured loans online for a variety of purposes. Clients can borrow up to PHP 2 million.
You can get an unsecured loan from BDO amounting from PHP 10,000 to PHP 1 million. BDO also offers personal loans for OFW borrowers through their Asenso Kabayan Program.
Security Bank allows customers to borrow up to PHP 1 million with loan terms of up to 36 months.
This online lender offers instant cash loans with payment terms of up to six months. You can get your loan approved within hours as well.
EastWest offers personal loans of up to PHP 2 million. If you’re an existing EastWest Bank credit cardholder, the loan’s annual interest rates range from 41.62% to 41.94%.
This online lending company offers unsecured personal loans. First-time customers can borrow a maximum of PHP 10,000.
BPI offers personal loans with payment terms of up to 36 months. You may also borrow three times your monthly income.
Interest rate and other charges:
Maybank allows clients to borrow up to PHP 1 million pesos, with an annual interest rate of up to 15.60%.
You can get a personal loan of up to PHP 10,000 in just one day with TALA. Their unsecured quick cash loans also have a maximum payment term of one month.
You can get a UCPB personal loan with payment terms of up to 36 months. They also offer a free UCPB eMoney Card as a payout option.
Unsecured loans are a good choice if you aren’t comfortable using your assets as collateral. However, you have to be careful as the interest rates tend to be higher than secured loans. When getting an unsecured loan, make sure that you need it and that you can manage the repayments.
Source:  Debt-To-Equity Ratio – D/E (Hayes, Investopedia, 2020)
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