• How Personal Loans can help increase savings

    Personal Loan BYTES FROM OUR KITCHEN

    Personal loans are always seen as an unnecessary liability rather than as a potential way to save. Most people in Singapore take personal loans for needs such as wedding, debt consolidation, a foreign trip, or a medical emergency. Personal loans are also not preferred much because of the high interest rates. But what if we told you that you could make your personal loan work hard for you and increase your savings?

    Investing through Personal Loans

    If you are a risk-favouring individual, one of the wisest things you could do with a personal loan is to use it as capital for investment. Some of the popular investment options in Singapore that can help you make good profits on your capital are:

    1. Unit Trusts: Also known as mutual funds, unit trusts are a diverse portfolio of assets/stocks. The amount you put in a unit trust is added with the amounts earmarked by other stakeholders and invested in the portfolio. The portfolio is chosen as per the theme or objective of the fund – such as growth-oriented fund or value-oriented fund. The returns on the unit trusts depends on the rise and fall of rates of individual shares/assets. Though there is no guarantee on how much you can earn, a unit trust can earn you anything between 3% and 12% per month (or more) in profits. The earnings depend on the kind of portfolio you’ve chosen. Equity portfolios linked to the market give you high returns but they are as likely to tank and cause you a loss. A debt portfolio gives you moderate to low returns but the profits would be more stable. A mixed portfolio would give you moderate to high returns with less volatility. We recommend investing in a mixed unit trust that invests partly in the market and partly in bonds or debt securities.
    2. Bonds: Bonds are debt securities issued by governments or companies who want to raise funds. These bonds will give you a fixed income every month or every quarter, apart from the 100% face value given when the bonds attain maturity. Bonds of governments, government agencies, quasi-government organisations and highly reputed companies are likely to give you the best returns. However, returns on bonds is unlikely to be very high – current rates range from 2% to 5% per year. Bonds will lose their face value if the issuer’s credibility has suffered in the market. Bonds are also likely to cause you loss if you redeem them before maturity.
    3. Exchange-Traded Funds (ETFs): ETFs are funds listed and traded on the stock exchange like shares. It functions like a mutual fund wherein the ETF contains money pooled in from a lot of investors, but its price movements depend on the stock or commodity index that it is mirroring. ETFs are not actively managed, due to which they have lower fees, but it may not be very easy for a layman to understand how ETFs function. The returns on ETFs could run up to 12-15% per year, or even more, depending on the components of the ETF.
    4. Fixed Deposits (FDs): This is the safest investment option you will ever find, but also the least productive. Fixed or term deposits are a specific amount of money deposited in an account in a bank for a fixed term. Fixed deposits in Singapore yield very little returns, which explains its unpopularity. Most banks give between 0.08% to 0.35% interest per year on fixed deposits, which is meagre compared to other investment options. However, FDs give you fixed returns and have little to no chances of being in loss.

    The best policy would be to diversify your investments so that if one or two of the products gives you a low yield, you can bank on the others to give you a decent profit. If you want to truly diversify your investment, you could, for instance, invest 60% of your capital in mixed unit trusts, 20% in bonds, 10% in ETFs, and another 10% in fixed deposits.

    Things to consider before taking a personal loan for investment

    This isn’t something many of us do, but you could take a personal loan and invest it in lucrative avenues for good returns and increased wealth. But there are some ground rules to follow before you decide to take a loan for investment. Some of them are:

    • Interest rate versus returns on investment: Consider the interest rate charged by the bank for the loan. Compare it with the returns you are likely to get on the investment you make. If the interest charges are going to be higher than the returns, you might want to consider changing your investment strategy. There’s no point making a loss in investment if the capital is coming from a credit product.
    • Fees and charges: Both the personal loan and the investment product you intend to put your money in, could have associated fees and charges. For example, sale of unit trusts and shares could attract capital gains tax, and unit trusts would attract fund management costs. If these fees are too high, it doesn’t really make sense to take personal loan for investment because you’d not be able to make decent profits. Consider the amount you’ll need to meet the lender’s or investment portfolio’s charges before you decide to borrow and invest.
    • Your risk appetite: You must have a moderate to high risk appetite in order to use a personal loan for investing. This is because low-risk investment products will not give you enough returns to make up for the interest rate and repayment of the loan amount. Additionally, it is quite likely that you would not be able to get good yield on your investment, and there’s also a chance that you might make losses instead of profits. Are you comfortable with that idea? How much of a setback would it be if your investment did not work out as you wished? Your risk appetite and ability to handle failures also needs to be considered before you take a personal loan for investment purposes.
    • Your current debt level: If you are already in debt – credit card dues, a car loan or home loan, etc. – then it is not advisable to take a personal loan at high interest rate for the purpose of investing. If your current debt is limited to low-interest loans, then perhaps it’s all right to consider the personal loan-for-investment option. But if you have no ongoing debts and you’re thinking of taking a loan for investment, then you should definitely go ahead and expose yourself to some credit and risk!
    • Your credit score: If your credit score is high, taking such a risk is okay and won’t harm your credit score or credibility. However, if your credit score is already in the red, then trying your luck by taking a personal loan for investment might be risky. Unless you’re sure that you would be able to make repayments on time and regularly, and that you have a chance to repair your credit score through a personal loan.
    • Your loan repayment options: Not making repayments on your personal loan regularly and on time will dampen both your credit score and credibility. Will you be able to repay the loan even if you do not make profits on the investment, or even if the investment runs into a loss? Take the risk of getting a personal loan for investment only if you are sure that you will not miss any of your personal loan monthly instalments. You might want to consider investing in a product that gives you regular returns – monthly or quarterly – if you would not be able to make repayments solely from your regular income.

    Taking a personal loan to invest is a big gamble and needs a lot of gut and gumption to see through. We advise you to assess the advantages and disadvantages of the loans as well as of the investment options very carefully, before taking this risk.

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