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Loans play a surprisingly significant role in our lives. If you have used your credit card recently, you have taken a loan! #WelcomeToAdulting
With GXS FlexiLoan turning one this April, we decided to kick off a series on all things loans.
We’re going to state upfront that we believe that loans can be a useful tool in your financial toolkit, if used wisely. And because sharing is caring, we’re going back to basics to help you determine if and when you might want to use a loan product for your needs.
Aren’t loans just loans?
The first thing you need to know about loans is that they fall into two big buckets - secured and unsecured.
- Secured loans: Secured loans are generally bigger and so require the borrower to pledge their assets as security. This means that if the borrower is unable to pay the loan within the agreed timeframe, the lender can seize the asset that was put up as collateral. Secured loans may sound scary but they are quite common - think vehicle and home loans!
- Unsecured loans: As the name suggests, such loans do not require you to pledge your assets as security.
For both secured and unsecured loans, your credit score plays an important role as most banks use this as the only or primary data point when assessing your creditworthiness. Check out our piece on getting your credit score in tip-top shape for more information.
The examples of secured loans are probably familiar to most of us. But enter the space of unsecured loans and things get more interesting.
- Personal loans: These are one of the more versatile financing products around - once you’re given the loan, you can use the money to finance anything you want! Different lenders charge different interest rates on personal loans, so be sure to familiarise yourself with the terms and conditions.
- Line of credit: A line of credit is a type of revolving credit i.e. there is no fixed tenure to the line of credit and it remains available even as you borrow and pay the balance. How it works is borrowers are given a credit limit that they can borrow up to and when they repay the amount they have borrowed, that money is available for use again. There is usually an annual fee to open a line of credit.
By the way, have you bought something and opted to “buy now, pay later” (BNPL)? BNPL has become a popular form of short-term financing in recent years and yes it too is a type of loan! They typically do not charge interest or fees during the instalment period. Before you jump on the bandwagon however, make sure it works for you because BNPL may encourage impulsive buying and if you are unable to make the payments on time, late fees will pile up.
We believe that loans - especially those that are customised to each borrower's specific requirements and needs - can be incredibly empowering. But these are not undertakings you should enter into lightly. Always do your research (start right here!) and don’t be afraid to ask questions to help you best decide if a loan is right for you.
If you are in the market for a loan, be sure to check out the GXS FlexiLoan, a personal loan with a credit line feature built into it. We launched the GXS FlexiLoan a year ago and have disbursed more than 100,000 loans. Best of all? Our GXS FlexiLoan customers have saved S$4 million in interest in the past 12 months thanks to the way we have designed our loan. And what way is that..? Find out more here.
