If you are expecting a big expense in the near future, you may be planning to get a personal loan. Now, you know personal loans are unsecured loans and, depending on your credit score, they can be really expensive. But do you know that if you are a homeowner in Singapore, you could consider taking a home equity loan that is generally cheaper than personal loan?
Read on to find out more about these two types of loans and how to choose the right option for your situation.
Things You Need to Know About Home Equity Loans
A home equity loan allows you to borrow funds against your equity in your home. It’s also referred to as ‘second mortgage’. Check out some key highlights of these loans:
- The higher the current market value of your property, the more you can borrow.
- You can use the money at your own discretion.
- Since these are secured loans, interest rates are generally lower than other types of loans.
How Much Can You Borrow With a Home Equity Loan?
The amount of money you get when you apply for this type of loan depends on:
- The current market value of your property. Lenders generally lend up to 80% of the value of the property.
- Your outstanding mortgage on the same property.
- The total CPF funds (including accrued interest) you used to purchase the property.
So, if you have a home that is valued at S$1 million and you owe S$300,000 on mortgage, your home equity would be S$700,000. But if you also used your CPF savings to purchase the property, then your home equity would be further reduced by that extent.
Pros and Cons of Equity Loans
- They are secured loans and hence have much lower interest rates than other loans.
- Interest rates are tax-deductible, if you use the money to improve, build, or buy a home.
- You can use the money for any purpose you see fit.
- If your home has enough equity, you will get a loan even if your credit score is not great.
- Longer repayment periods.
- Repeatedly defaulting on repayments could lead to you losing your home.
- Since these loans make you eligible to borrow large amounts, you might be tempted to borrow more than you need. Borrowing more than required is likely to make you spend more than you need to.
- Repeatedly using your home as a source of funds after one equity loan is over can become a habit.
- Depreciating market values will affect the amount of loan you get.
Things You Need to Know About Personal Loans
Personal loans offer an easy and convenient way of getting money for an emergency. Some of the key highlights of personal loans are:
- These are unsecured loans.
- These loans offer you the freedom to spend the money at your own discretion.
- You can repay the loan in equal monthly instalments.
How Much Can You Borrow With a Personal Loan?
Most Singaporean banks allow you to borrow up to four times your monthly income, provided you meet the eligibility criteria for the loan.Apart from the eligibility criteria, banks and lending institutions in Singapore also look at your credit score before they approve your loan application . If you have a good credit rating, you stand to get a higher loan amount with better tenures and interest rates.However, if you have flawed credit, your chances of getting the loan amount you desire are low. In some cases, banks may not approve your loan at all.
Pros and Cons of Personal Loans
- No security or collateral is needed to apply for the loan.
- High financial flexibility and freedom of spending.
- They require fewer documents when compared to other options such as car loans, education loans, and home loans.
- Faster processing by banks results in quick cash.
- Fixed interest rates – you are safe from fluctuating rates.
- High rates of interest when compared to other specific loans such as education loans and car loans.
- Defaulting on instalment payments results in additional penalties and charges.
- There is always the temptation to take personal loans for unnecessary expenses, such as expensive vacations and buying expensive clothes and accessories.
Which of the Two Is Better For You?
Both the types of loans have their own advantages and disadvantages. To know which options is the best for you, there are few things you need to consider:
How quickly do you need funds? This a big factor when you are comparing these two loans. While personal loans usually get approved the same day, the home equity loans may take weeks.
How big is your requirement? If you need a small amount, it makes sense to go for a personal loan than an equity loan. However, if you want to finance a second home or if you want to buy a home for your children, taking an equity loan can get you the required funds.
For how long do you need funds? If it’s a short-term requirement, like for 1 year or 2 years, you can go for a personal loan. However, if your requirement is long term, you can consider taking an equity loan.
How much equity do you have? If you have recently purchased the home, you may not have enough equity to borrow funds. Assume that you need to borrow S$200,000. Your home’s current market value is S$400,000 and you still owe S$300,000 on the mortgage. So, in this case, you don’t have enough equity to raise the funds you need.
Some Points to Keep in Mind
Both types of loans are highly attractive and may seem like the perfect ways to get additional funds. But there are a few points that you must keep in mind before you apply for either of them.
- Remember that they are both loans and have to be repaid.
- Evaluate your need first. Apply only if you have no other choice.
- Resist the urge to overspend, especially with home equity loans.
- Review your monthly budget and make sure that you have the financial bandwidth to accommodate the monthly instalments.
- With personal loans, choose Effective Interest Rates (EIR) over the advertised rates while choosing a suitable loan plan.
- Defaulting on repayments will lead to heavy penalties and interest charges.