• Personal Loan vs Personal Line of Credit

    Personal Loan BYTES FROM OUR KITCHEN

    The difference between personal loans and a personal line of credit is a question that is often posed, and a topic that’s often misconceived. While both these instruments give you the much needed access to funds, a personal loan is very different from a personal line of credit. Let us understand how these financial instruments function and evaluate their differences.

    Personal Loans

    A personal loan is an unsecured loan offered by banks and financial institutions at a fixed rate of interest. Repayments towards personal loans are to be made over a fixed tenure (unless the amount is repaid in full along with additional interest related charges). The tenure period depends on the amount that is borrowed and banks give the freedom of choosing the tenure period to the individual.

    Personal loans are the most preferred types of loans, mostly because they are more easily available than other loan types. The interest charges, however, are higher in the case of personal loans - home loans and car loans attract a comparatively lesser rate of interest. A personal loan comes well in handy during urgent cash requirements to take care of medical emergencies, education, or any other facet that requires access to funds.

    Personal loans come with a fixed interest rate and a fixed tenure. This gives the borrower adequate leeway to plan various aspects of his/her finances while making repayments towards the loan. Unlike home loans that can be borrowed at floating rates as well as fixed rates, home loans in Singapore aren’t offered at floating interest rates.

    In order to be eligible for a personal loan, there are a few factors that come into play. Banks assess an individual’s credit worthiness and other aspects including income, amount of money owed in the form of debt (credit card debt and other loans availed, if any), employment stability, etc. Let us address each of these aspects and observe the bearing they have on an individual’s personal loan application.

    Annual Income

    If you are looking to apply for a personal loan, your annual income is a crucial factor that banks consider while reviewing your application. The amount you are eligible to borrow is dependent on your income slab - a decent income would mean that the amount requested by you will more or less be disbursed. While annual income is amongst the most important parameters that banks take into account, your annual income isn’t the only facet that impacts your loan application.

    Amount of debt in your name

    Having too much debt under your name isn’t a good sign - this situation can lead to your loan application being rejected. If you’re already deeply debt-ridden, it pretty much goes without saying that the probability of you defaulting on your monthly payment is relatively higher. More the amount of debt in your name, more the chances of your loan application facing rejection.

    Credit Scores

    Your credit score is perhaps the most important parameter that influences your loan application. As such, whatever the type of loan instrument, credit scores play a major role - a bad credit score will severely dent your chances of getting the loan amount disbursed. A good credit score, on the other hand, will enable banks and financial institutions to understand that you’ve managed your credit well in the past. Credit scores reflect aspects including your credit history - incidents of late payments and credit card defaults, total amount of money as debt, amount of credit used against the total allocated credit limit, failures to make repayments on loans, and types of credit availed in the past.

    While it is true that credit scores majorly influence a personal loan application, it certainly is possible to get a personal loan with a bad credit. In such a situation, having an existing relationship with the bank and high income will most probably get your loan application approved. Personal loans can also be availed in the event that you don’t have a credit history.

    Personal line of credit

    A personal line of credit is a type of flexible loan offered by financial institutions to individuals and businesses. This line of credit is actually an amount of money and enables an individual or a business to access this amount flexibly (as and when it becomes necessary). Repayments can be made immediately or flexibly over a period of time. It isn’t necessary that the individual or the business use the entire amount available - any amount equivalent to or less than the line of credit can be used at any point in time.

    A personal line of credit is different from a personal loan as it brings in the element of flexibility in accessing funds. While availing a personal loan involves borrowing a fixed amount that needs to be repaid over a tenure period, the amount on the personal line of credit can be used flexibly whenever necessary. Just like personal loans, however, a personal line of credit also attracts interest when a percentage of the amount available as credit, is used. Basically, in the case of a personal line of credit, you’ve already borrowed the money and you’re charged an interest on the amount of money you’ve spent - which pretty much works out much better than other types of loans, especially if you’re running a business.

    Applying for a personal loan or a personal line of credit

    Personal loans can be applied for by visiting the official website of the bank you wish to avail the loan from and filling out the online application form. All top banks in Singapore offer personal loans - you might want to compare interest rates offered by various banks and opt for the most fitting choice. After filling out the application, you will be required to submit relevant documents such as your identity documents, income documents and employment documents. The bank will then review your application and approve it if all eligibility parameters are satisfied. The same can be done in the case of a personal line of credit. If you wish to avail a personal line of credit for your business, you will be required to submit additional documents authenticating ownership, registration, and control.

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