• Everything You Need to Know About Taking a Personal Loan

    A personal loan can be of great financial help in times of need such as:

    • Paying off credit card balances
    • Family emergencies
    • Wedding requirements
    • Honeymoon or vacation expenses
    • Consolidating smaller debts
    • Medical emergencies

    However, for vacation and wedding expenses, apply for a personal loan only as a last resort, only if you have no other option.

    1. Identify Your Need for a Personal Loan
    2. It is easy to get carried away with the attractive amounts and interest rates being provided by various banks. Borrowing more than you need can put you at great risk. Keep in mind to:

      • Define your need clearly.
      • Borrow only if the need is absolutely urgent and required.
      • Borrow only for that specific purpose. Over-borrowing can become a bad and dangerous habit.
      • Make sure you don’t borrow more than you can repay.
      • Monthly repayments should be less than 30% of your monthly income.
      • Don’t borrow for luxuries such as expensive vacations, etc. unless it is absolutely necessary.
    3. Qualifying Criteria for a Personal Loan
    4. Most banks in Singapore have the following criteria that need to be fulfilled in order to be eligible to borrow from them:

      • Age must be between 21 to 65 years.
      • Singapore citizens, PR, and foreigners are eligible.
      • Singaporeans and PR must earn a minimum of S$20,000 p.a.
      • Foreigners must earn a minimum of S$40,000 p.a.
    5. Maximum Borrowing Under a Personal Loan
    6. For unsecured loans, the amount you can borrow depends on your annual income.

      • For annual incomes less than S$20,000, nil.
      • For annual incomes of S$20,000 or more but less than S$30,000, up to 2 months’ income.
      • For annual incomes of S$30,000 or more but less than S$120,000, up to 4 months’ income.
      • For annual incomes more than S$120,000, up to 10 times the monthly income.

      Secured loans generally don’t have any borrowing restrictions.

    7. Your Credit Score Determines Your Personal Loan Affordability
    8. Lending banks always check your credit rating before they sanction a loan. Credit rating affects your borrowing power in the following ways:

      • Good credit rating gives you lower interest charges, and loans are approved faster.
      • A low credit score will mean higher interest rates on repayment.
      • Previous defaults in payments will lower your rating.
      • Banks look for credit card payment history, mortgages, and other existing loans.
      • Very low credit scores can get your loan application rejected.
    9. Revolving Loans vs. Term Loans
    10. Personal loans fall under two period categories – term loans and revolving loans.

      Term loans:

      • It is given for a fixed time period.
      • Monthly payments or instalments are also fixed.
      • Interest rates are lower.
      • Banks charge a processing fee after approval.
      • Banks also charge a prepayment fee for any additional payment before the tenure ends.

      Revolving loans:

      • Also called a personal line of credit or credit line.
      • Can be used anytime and anywhere, up to the specified limit.
      • Minimum monthly payment is generally 2.5% of the loan amount or S$50, whichever is higher.
      • Highly flexible borrowing option – freedom of paying back the loan as soon as possible.  
      • No fixed time period, but interest rates get higher as the period extends (sometimes 3 to 5 times that of term loan interest rates).
    11. Compare Loans Based on Effective Interest Rate (EIR)
    12. Various banks offer attractive interest rates that seem very low, some even as low as 3%-5%. But the effective interest rate (EIR) that you will end up paying will be a lot more. Therefore, EIR is a better standard of comparison since:

      • EIR shows the actual cost of borrowing.
      • Banks almost never reveal the EIR.

      The following table will show you the difference between advertised rates of interest and effective interest rates for various banks:  

      Bank Name of loan Interest Rate (p.a.) EIR (p.a.)
      POSB POSB Personal Loan Starting from 3.88% Starting from 7.56%
      Citibank Ready Credit Paylite Starting from 4.55% Starting from 8.5%
      Standard Chartered CashOne 6.88% 12.75%
      UOB UOB Personal Loan 7.25% 12.09% to 13.35%
      HSBC HSBC Personal Loan 6.5% to 9.5% 12.12% to 18.21%

      Always insist on being told the EIR so that you can have an estimate of what the true cost of the loan will be.

    Is a Personal Loan the Best Option for you?

    Before borrowing from a bank, make sure that this is indeed the right choice.

    • Personal loans are better than credit cards but still have high rates of interest.
    • For education and home requirements, there are specific loans that have lower interest rates than general personal loans.
    • Be sure of your ability to repay. Defaulting on payments can adversely affect your credit rating.
    • They can help you consolidate other debts, and pay off high-interest credit card debt.
    • Once you know how much you have to pay each month, manage your budget accordingly to ensure regular repayment.

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