What Are Secured and Unsecured Loans? A Brief Introduction to Different Types of SME Asset Pledge Loans and Interest Rate

What are the benefits and risks of pledging properties, savings, or other assets? What assets can be pledged as collateral for unsecured and secured loans? Here’s an all-rounded introduction to various SME asset pledge loans. 

What is a Secured Loan?

A secured loan, like what the name suggests, is when you offer something as collateral or security in return for a loan, such as property or cash accounts, etc¹. If the borrower fails to repay the loan on time, the bank or the lender has the right to repossess or foreclose the collateral or utilise other means and seize the assets to cover the outstanding loan balance¹. In Hong Kong, residential mortgages, share margin financing, taxi loans, etc., are some of the common types of secured loans². 

What Types of Assets Can Be Pledged as Collateral for Secured Loans?

Eligible collateral may include property and fixed deposits, which are also eligible assets used as collateral for DBS SME Banking’s overdraft service³.  Basically, items that may be used as collateral for a secured loan need to meet the following criteria⁴:

• The market value of the asset can be readily determined and reasonably verified;
• They are easily marketable and there is an existing, available secondary market for selling such assets;
• The assets are managed by a party with professional expertise and systems such as a bank or an authorised loan institution;
• Banks or authorised loan institutions can legally enforce their rights to repossess such assets without obstruction;
• Assets such as gold, precious metals or taxi registration books need to be in the custody of banks or authorised loan institutions. 

What Assets Cannot Be Used as Collateral for Secured Loans?

Some examples of assets that may not be used as collateral for secured loans include, but are not limited to: 
●    Shares of the borrowing business or its holding company⁵
●    Guarantees⁵

Secured Loan Vs. Unsecured Loan

An unsecured loan can be referred to as money borrowed without providing any collateral; Credit cards, personal loans, tax loans, and overdrafts are common examples of unsecured loans¹. Both unsecured and secured loans have their own merits. 

It only takes a few simple steps to apply for DBS’ SME Business Instalment Loan online, and both secured and unsecured loans are available options6. Applicants need to submit the required documents, such as company registration documents and business profile, the latest bank statements from major Banks, business owners’ information, etc⁶.  

In addition, Hong Kong Mortgage Corporation Insurance Limited (“HKMCI”) has launched various SME Financing Guarantee Schemes (“SFGSs”) since 2011. Some of these schemes require no assets pledged as collateral, and they provide credit guarantees of 50% to 100% for loans approved to qualified enterprises by lending institutions. However, there are restrictions on how the funds are used⁷. More details can be found here (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkmc.com.hk/files/product_shortcut/6/74/eng/SFGS%20Factsheet_Eng_Final_clean.pdf). 

Interest Rate and Loan Amount of Secured Loans

1.    Interest Rate:

The interest rate of a secured loan is decided upon market trends and the Prime rate set by the bank. In reference to the latest update on the 4th August 2023, DBS SME Banking’s HKD Prime rate is 6.000% p.a.⁸ . As for unsecured loans, there is a wide range of loan schemes available - as unsecured loans are collateral-free¹, the actual interest rate will depend on the individual loan scheme offered.  

2.    Loan Amount: 

Take DBS SME Banking’s SME Business Instalment Loan as an example, the loan limit of a secured loan can be maximised to HK$10 million, and the collateral-free instalment loan amount can reach up to HK$3 million⁶. 

If your SME is looking to boost cash flow and working capital, DBS SME Banking offers business financial and loan solutions, which help businesses enhance flexibility and adaptability. Already have a thorough plan in hand to meet market challenges and seize rising opportunities? Click here to apply now! 

To borrow or not to borrow? Borrow only if you can repay! 

Article published date: 13 November 2023

¹Source: Investor and Financial Education Council - Loan Basics (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.ifec.org.hk/web/en/moneyessentials/debts-and-borrowing/loan-basics.page)
²Source: Hong Kong Monetary Authority - Supervisory Policy Manual #5.2 (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-7.pdf)
³Source: DBS SME Banking - Overdraft
⁴Source: Hong Kong Monetary Authority - Supervisory Policy Manual #3.1.1 (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-7.pdf)
⁵Source: Hong Kong Monetary Authority - Supervisory Policy Manual #3.1.5, #3.2.4, #4.2.2 (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-7.pdf)
⁶Source: DBS SME Business Instalment Loan
⁷Source: SME Financing Guarantee Scheme - SME Financing Guarantee Scheme Factsheet (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkmc.com.hk/files/product_shortcut/6/74/eng/SFGS%20Factsheet_Eng_Final_clean.pdf)
⁸Source: DBS - Last 5 updates of DBS HKD Prime 

^{^}Terms and conditions apply.
^***Subject to eligibility and conditions.