Multiple banks. Different interest rates. Call it a "conflict of interest".
  • Personal Loan vs. Home Loan – Know the difference

    A personal loan is an unsecured loan and you can use it for any purpose without providing any collateral. A home loan , on the other hand, is a secured loan and can only be used to purchase a house. The house you purchase becomes the collateral. So, if you fail to pay the loan back even after repeated reminders, the bank can take over your home. Let us compare the two based on the following parameters:

    Reasons to Apply for a Loan

    Personal Loan: You can use a personal loan to pay off your accumulated debts, spend on a wedding, renovate your house, or even start a small business. The interest rate applied for this loan is higher than other loans as the bank has no collateral against the loan amount disbursed.

    Home Loan: You can apply for this loan only when you want to buy a house. This includes HDB as well as private houses. The rates of interest are lower than other loans as it is a secured loan.

    How These Loans Work

    Personal Loan: You will have to pay the loan back in equal terms or instalments that should be made each month. The interest rates can either be fixed or variable, and the repayment can be in fixed amounts or flexible amounts, depending on the type of loan you’ve chosen.

    Home Loan: They come with fixed repayments, and it can be repaid over the period of your loan in monthly instalments. The type of home loan you are getting determines the rate of interest. Fixed-rate packages are linked to the bank’s board or fixed deposit rate, while floating-rate packages are linked to SIBOR or SOR. The rates will fluctuate as and when the base rates change.

    What the Interest Rates Are

    Personal Loan: Banks in Singapore offers two types of personal loan interest rates – Fixed Rate and Flexible Rate. These rates often depend on factors such as your loan amount, credit score, loan tenure and annual income. However, the applied rate ranges roughly from 5% p.a. to 15% p.a.

    Home Loan: Most banks in Singapore offer loans with various kinds of interest rates. These are as follows:

    • Fixed Rates
    • SIBOR-pegged Rates
    • SOR-pegged Rates
    • Board or Deposit-linked Rates
    • Hybrid or Variable Rates

    The rate of interest for most banks in the first year varies between 1.5% p.a. and 2% p.a.

    Benefits of These Loans

    Personal Loan:

    • You can use it for any purpose.
    • The application process is hassle-free.
    • There is no risk of losing a valuable asset under any circumstance.
    • The calculation of your unsettled debt is easy as you repay in fixed instalments.
    • You can settle your debts faster as the loan tenures are generally less than 7 years long.

    Home Loan:

    • You get up to 35 years to repay the loan. This will help reduce your monthly commitment towards the loan.
    • There are tax benefits when repaying it.
    • You can get subsidies on house purchase through government schemes.
    • With this loan, you purchase a house, which is an asset whose capital appreciates in the years to come.
    • Housing loans are a good opportunity to build a high credit rating.

    Eligibility Criteria for Personal and Housing Loans

    Personal Loan:

    • Citizens of Singapore, Permanent Residents and foreigners can all get personal loans.
    • You must be aged between 21 and 65.
    • Most banks set S$30,000 as the base annual income. They allow you to borrow up to four times your monthly salary if your annual income is at least S$30,000, and up to 10 times if it is more than S$120,000.
    • Some banks also let you borrow at annual incomes of S$20,000 or more, but the interest rates would be higher and the loan amount, lower.

    Home Loan:

    The eligibility criteria are different for HDB loans and bank loans. In Singapore, most banks have two main criteria to assess your loan eligibility:

    • Total Debt Servicing Ratio (TDSR): It is a ratio of your total debt obligations per month to your total monthly income. To be eligible for a home loan, your TDSR should not exceed 60%. This has been done to discourage people from borrowing in excess.
    • Loan-to-Value Ratio: This is the loan amount taken on a property in relation to its price expressed as a percentage. Your LTV will be high and you can borrow a large amount if you have no outstanding loan, the tenure doesn’t exceed 25 years, and you are below 65 years o age.

    The two main parameters for bank loans for house purchase are:

    • You should be at least 21 years old.
    • Your annual income should be at least S$24,000.
    • Foreigners can only purchase certain kinds of properties in Singapore. For instance, they cannot purchase HDB flats unless a Singapore citizen is a co-applicant.

    Impact on Your Credit Score

    Personal Loan: Just like any other loan, if you repay your personal loan on time, your credit score will significantly improve and you can build a good credit history in the process. However, if you miss payments on a regular basis, your score will get affected.

    Home Loan:  Late repayments on your monthly loan instalments can have a huge impact on your credit score. However, you can still clean up your credit history since the Credit Bureau report shows your payment records only for a period of 12 months.  

    The important thing to remember is that you should never take a personal loan to buy a house: for three reasons. One, the interest rate will be very high. Two, the tenures are lower. Three, the monthly repayment amount could be exorbitant due to a combination of higher rates and smaller tenures. Home loans, with lower rates, longer tenures and affordable repayments, is the perfect match for your house.

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