Personal loans are debt instruments that you can use to meet your short-term financial needs. Being unsecured loans, they offer you peace of mind and a convenient way to raise funds without providing a specific reason to the lender.
How Does a Personal Loan Work in Singapore?
Unlike loans like home loans, renovation loans, or car loans, a personal loan isn’t secured. So, you won’t have to furnish collateral to take out the loan. While this means that you don’t risk losing a valuable asset if you become financially unsound or bankrupt, it also means that you’ll have to pay back your dues at a higher rate of interest.
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Most lenders will allow you to claim a loan that is four times your monthly income if your annual salary is more than or equal to S$30,000 but less than S$120,000. If you earn more than S$120,000 a year, some lenders may let you borrow up to 9-12 times your monthly income through this kind of loan.
The loan tenor may vary between one and seven years. The following are the common types of personal loans in Singapore:
- Fixed monthly payments: You’ll have to repay a fixed amount every month till you clear your debt completely. The amount doesn’t vary, allowing for easier budgeting. You’re expected to make the monthly payments in full. The interest rate applicable on a personal loan can be anywhere between 8% p.a. and 15% p.a. If you fail to make monthly payments in full or in time, the interest may increase.
- Line of credit: A line of credit allows you to draw loans whenever you want till maturity. The best part about a line of credit is that you’ll have to pay interest only on the amount you have used and not on balance. As soon as you pay off the loan in full, credit up to the full limit will be restored. You can take multiple loans from the same credit line till it ends.
- Balance transfer: A balance transfer is a financial concept that allows you to transfer all your other unsecured debts or balances into one fund/account. A balance transfer loan usually offers a much lower interest rate and an interest-free/grace period. A balance transfer fund is great for consolidating debts on multiple credit cards to reduce the interest burden.
- Debt consolidation plan: A debt consolidation plan is a personal loan that can be taken to reduce one’s debt burden since it offers loans at a lower interest rate. However, note that once you opt for this plan, all your existing unsecured credit lines will be terminated, and you will not be able to apply for new lines of credit until you clear a certain amount of debt first. Many Singaporeans opt for this loan as a last resort when unable to manage their rising debt at existing interest rates.
- Secured overdraft: A secured overdraft, as the name suggests, is secured with an acceptable asset to the lender. The value of the total credit is usually determined by the asset held as collateral. Usually, fixed deposits or other forms of deposits already held with the lender may be used as collateral to take out a loan.
Why Is Caution Recommended?
A personal loan is a great option available to you to meet your short-term cash needs. However, just because you qualify for a loan, you shouldn’t take one. If you have alternatives to satisfy your cash needs, you shouldn’t apply for one because these loans charge high-interest rates that may at times outweigh the benefits.
Remember that defaulting on your loan would affect your credit score and your eligibility for loans in the future. Hence, you should take a loan only when necessary and when you’re sure that you can settle it on time.
Things You Need to Do Before Applying for a Personal Loan
The following are some of the things that you should consider before applying for a loan in your personal capacity:
- Type and rate of interest: Lenders in Singapore may either levy a fixed rate of interest or a floating rate of interest (rare). You need to think long-term when deciding on the type of interest rate you want. Although apparently higher, fixed rates provide security against inflations and volatilities that can spike up the interest rate. Floating rates are less stable. Also, shop around to get the best lowest rate of interest. A difference of even one or two percentage points between rates can make a significant difference to the final amount you pay.
- Know more about the charges: Find out more about the charges. Processing fees, pre-closure fees, duplication fees, and documentation charges are some of the common fees you’ll have to deal with. Keep an eye out for loans that offer special waivers.
- Read the offer document carefully: Knowing your loan’s terms and conditions will save you a lot of hassles later on. Most lenders would highlight the benefits of the loan. Disagreeable clauses may only be mentioned under the terms and conditions segment. Reading them carefully would offer you a complete picture of the usefulness of your loan.
A lower tenure of payment would save you a lot on interest. Try to pay more than the minimum due every month, if possible. Opt for a tenor that optimizes your benefits without increasing your risks of default.