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    Cash Advance vs Personal Loan: Which one you can choose?

    You might sometimes find yourself in a financial emergency due to medical issues or unplanned expenses. When you need extra cash to fulfil your needs, you could consider either a credit card cash advance or a personal loan. Though both of them lend money, the urgency of your requirement and the financial situation you are in will determine which one you choose. Banks in Singapore offer both these services to their customers under certain conditions. Let us look at both these credit products to understand them better.

    Credit card cash advance

    Credit card cash advance is the money that credit card companies or banks allow you to withdraw from your card account. You can do this by inserting the card at an ATM machine and withdrawing money using the credit card PIN. This is considered as a regular transaction and is chargeable.

    What is it useful for?

    It is mainly a provision for emergency cash access. For example, in case of medical emergencies or in the event of non-acceptance of your credit card by a merchant, this facility will help you deal with short-term financial needs.

    The pitfalls

    The hassle-free nature of credit card cash withdrawal may tempt you to use it again and again. This could form a bad financial habit. If you are unable to pay the entire amount back with interest, the amount will keep piling up, leading to a huge debt. Here’s how cash advances could hurt your finances:

    • Cash advances have a higher interest rate than your regular card transaction. The rate is at least 3% p.a. higher. Usually banks charge an interest of 28% p.a. on cash advance. Also, the interest on withdrawing money from a credit card is charged from the date of transaction. There is no grace period. This means that you’re paying a high interest charge from day one.
    • There is also a fee applicable on each withdrawal. This ranges from 5% to 6% of the amount you withdraw using the card, subject to at least S$15 per transaction.
    • Cash withdrawals are a part of your credit limit. If you take out more money than your credit limit allows, you will have to pay higher charges. This charge differs from bank to bank.

    Things to consider before opting for a credit card cash advance

    • Unlike a regular card transaction, interest will start accumulating from the day you take out the money. There is no interest-free period for a cash advance.
    • The interest rate is compounded.
    • Be aware of what your withdrawal limit for cash advance is. If you withdraw more than your cash advance limit, you will incur additional fees.
    • If you can pay for an item or service by card, then it is always better to do that.
    • Repay your withdrawn cash advance as soon as possible and in full.
    • You need to remember this is to be used as a last resort only in times of emergency.

    Banks offering cash advance on credit cards

    All banks in Singapore allow you to withdraw money using your credit card. The prominent among these banks are:

    • HSBC
    • Citi Singapore
    • OCBC
    • Standard Chartered
    • DBS/POSB
    • UOB
    • Maybank
    • Bank of China
    • CIMB
    • American Express
    • ICBC

    Personal loan

    A personal loan is an amount borrowed from financial institutions like banks. These banks may lend you money on a predetermined interest rate and tenor. You have to pay regular instalments to repay the principal amount plus interest rate.

    There are two types of personal loans – Term Loan and Revolving Loan. Repayments towards term loan needs to be made every month where the loan amount and tenor are predetermined. Revolving loan does not have a predetermined amount and tenor, and is flexible in these aspects. However, you must pay the minimum requirement every month, which is usually 3% to 5% of the outstanding amount.

    Advantages of personal loan

    It is easier to apply and get approval for a personal loan especially if you have maintained a good credit score.

    • Personal loans are easily and readily available.
    • Personal loans require minimum or in some cases, no documentation.
    • As there is no collateral or security involved in a personal loan, it requires very less processing time.
    • Personal loans charge one of the lowest interest rates.
    • Depending on your eligibility, you can borrow a significantly large amount through a personal loan when compared to a credit card.
    • The repayment period on a personal loan can be as short or long as you desire.

    What is it useful for?

    • It functions as a short to medium-term financing option.
    • Personal loans can be used to meet any monetary requirement – whether it is a medical emergency, paying for your destination wedding, or even going on a holiday.
    • You could also apply for a personal loan when you want to start a small business on your own.
    • Personal loans are also useful for paying off credit card debt. This is because the interest rates of personal loans are lower than that of credit card repayment.
    • In addition, the tenor goes up to 5 or 7 years. Therefore, the amount to be repaid is not too heavy on the pocket.

    Things to consider before opting for a personal loan

    • The EIR (effective interest rate) is always higher than the applied interest rate as these include the other charges and fees that the bank has decided upon. It is vital to read the terms carefully before you apply for the personal loan.
    • You need to have a good credit history to get a personal loan approved at low interest rates.
    • You must meet the eligibility criteria of the bank in order to qualify for the loan.
    • Personal loans may or may not have prepayment penalties if you try to pay off your loan earlier.

    Banks offering personal loans

    Many banks in Singapore offer personal loans up to 2 to 6 times your monthly income (some banks even offer up to 10 times your monthly income depending on your annual income), but it is capped at S$200,000. Banks could change interest rates from time to time. Here are some prominent banks offering personal loans in Singapore:

    • HSBC
    • Citi Singapore
    • OCBC
    • Standard Chartered
    • DBS/POSB
    • UOB
    • Maybank
    • Bank of China
    • CIMB
    • ICBC

    Comparing the two emergency cash options

    Let us compare the two options to see which is better:

    Feature Credit card cash advance Personal loans
    Interest rate 28% to 29% p.a. Starting from 8.5% p.a.
    Convenience of applying Insert your card in an ATM machine and withdraw money using your PIN. You can apply online for most banks. The money will be disbursed to your account once approved.
    Time taken for access to money Immediate One to five working days
    Credit limit Depends on your income – generally up to 4 times the monthly salary Depends on your income – generally 2 to 10 times the monthly salary
    Withdrawal charges 5% to 6% of the amount taken None
    Eligibility criteria You must have a credit card already. You must meet the income and age criteria set by the bank.
    Credit score Not applicable if you already own a credit card that you will use for cash advance Easier to attain a loan if your credit score is good.

    The verdict

    Though cash advances are easier to get, they are more expensive to pay off. They have higher interest rates because these interest rates are compounded from the very day of the transaction. Cash advances could be your last resort in case of a financial emergency.

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