Under risk-based pricing, creditors tend to demand extremely high interest rates as a condition of extending unsecured debt.
Without collateral, the creditor stands to lose the entire sum outstanding at the point of default and must boost the interest rate to price in that risk.
Unsecured loans are often sought out if additional capital is required although existing (but not necessarily all) assets have been pledged to secure prior debt.
Unsecured loans are primarily based on the borrower's creditworthiness, with lenders evaluating credit history, income, and financial stability to determine eligibility.
It's important for borrowers to carefully consider their ability to repay an unsecured loan, as failure to do so can significantly impact their credit score and financial health.
To safeguard borrowers from excessive debt accumulation, the Monetary Authority of Singapore (MAS) has implemented measures effective since January 1, 2018.
The borrowing limit, set industry-wide, aims to prevent long-term reliance on unsecured credit and reduce debt accumulation.