• Choosing a Bank for a Loan

    Personal Loan BYTES FROM OUR KITCHEN

    When you start looking around for loans in the market and shortlisting banks, there are several factors that need your attention before you make your decision. Starting from the reason why you need the loan to calculating if you can afford one at the rates offered by your or any lender, there many factors that will influence and ultimately make the decision for you regarding the loan and the bank from which you should borrow. Some of the most important factors to consider before choosing your bank are discussed here.

    Determining the purpose for your loan

    The most basic reason to consider before you approach any bank or financial institution for a loan is to ask yourself why you need the loan. You need to review your purpose for seeking a loan thoroughly because you will spend substantial amount of time and money to repay this loan. Ideally speaking, a loan should always be taken to build an asset or for a tangible/ intangible return, for instance a loan to buy a car that will take care of your transportation issues or a loan for higher education that will build your career.

    Once you have determined the purpose of your loan, you can then choose a specific loan that fulfills that purpose, i.e. a car loan for the purpose for buying a new car or an education loan to pay for your higher education. These loans more often than not require a security or collateral to be provided before the loan amount is disbursed. There are however other loans such as a personal loan or different credit cards that offer you the loan without any security, these types of loans are called unsecured loans, one where no collateral is required. You must note that unsecured loans are usually provided at a higher rate of interest than secured loans because of the risk involved. Therefore, it is advisable that before you make a decision of choosing a secured or unsecured loan or any specific loan for that matter, you could speak to different bankers and discuss your needs, requirements and financial status and see if they have any packages that fit your financial profile.

    Repayment Capacity and Loan Eligibility

    All leading banks and financial institutions today provide EMI (Equated Monthly Installment) Calculators that can help you determine how much money you will have to pay each month for the loan you wish to apply for. EMI Calculators typically require details such as your loan tenure, your interest rate and your processing fees depending on which you will get an accurate figure of what you owe this month. This help you know if you can afford the loan in the first place because the payments for the loan have to be made each month on a specified date. This calculation will help you realize how much extra money you have set aside from your income regularly to make these payments until the loan tenure elapses. These calculators can also help you determine your loan quantum eligibility for the given loan tenure at the interest rate offered.

    Certain loans also require additional criteria to be met, for example car loans and home loans have a specific TDSR requirement (Total Debt Service Requirement – this is the ratio of your income to your liabilities). Hence, it is advisable to calculate your TDSR rate before you apply for the loan. Lastly, your credit score plays a massive role in determining your loan eligibility and the package that you will receive from any lender. You can request for your credit score by applying to the bureaus gazetted by the MAS or the Monetary Authority of Singapore - the DP Credit Bureau Pte Ltd. and the Credit Bureau (Singapore) Pte Ltd.

    Conduct thorough research

    By the time you come to the third factor, you will have enough information regarding the purpose of your loan, your financial status, your credit score, your personal loan eligibility and your repayment capacity for you to start researching loan options offered by different banks. You need to do a lot of window shopping before deciding which bank offers you a financial solution that suits your needs and requirements. Below are some of the factors that you need to look for when you are shopping around looking for your perfect bank for your loan –

    • Loan Amount
    • Do your research and determine which banks offer the highest loan amounts that you need to meet your purpose.

    • Rate of Interest
    • Interest rate is one of the most influencing factors of a loan package. It will tell you how much more you have to pay over and above the repayment of the principal amount borrowed. Always look for the banks that offer you the lowest interest rate packages because you will repay lesser amount in that case.

      Apart from looking for the lowest interest rates offered, you also need to decide if between choosing fixed rate loans and floating rate loans. A fixed rate loan is one where the interest rate is fixed and will remain the same throughout the loan tenure. A floating rate loan on the other hand is where the interest rate will fluctuate according to the market conditions. A floating rate loan may offer you a lesser interest rate in the beginning but they can decrease or increase at any time depending on the market conditions. The interest rate in a floating loan increases because the quantum of your repayments increases. However, if you decide to choose a floating rate loan over a fixed rate loan, choose a bank which pegs its interest rate against SIBOR or SOR and not one that pegs the interest rate against the internal board rates of the bank.

      Another aspect to consider when it comes to interest rates is “teaser interest rates”. These rates are provided typically for a specific period of time in the initial months or years of the loan tenure as an offer and will elapse and after which, depending on the loan package chosen by you, the interest rate will either switch to fixed or floating rate loan.

    • Loan Tenure
    • Depending on your loan amount and repayment capacity, you will decide in how many years you can successfully repay the loan while continuing your present lifestyle and making room for unforeseeable emergencies. You must then look for a bank that is willing to offer you the loan for the tenure that is best suited for you without you having to settle for a tenure that is chosen for you by the bank. It is, however, important to note that, the longer the loan tenure is, the more interest you will ultimately pay the bank. Long loan tenures have become less desirable in the present times because you can increase your savings with shorter loan tenures where interest payments made are lesser. The difference between the amount borrowed from the bank and the amount repaid continuous to increase the longer the tenure of the loan is.

    • Customer Service
    • Every bank has customer service but not all banks show customer friendliness. A customer service can be good but not necessarily friendly but you should choose one that is friendly rather than one that is good. This is because somewhere along the loan tenure period you are unable to make the payments on time or make defer on one or two payments due to an unforeseeable emergency such as loss of income, medical emergencies etc. At this point, you will want a customer service that will walk you through this tough time with a reasonable process and pardon your mistake rather than a torturous one that immediately slaps you with late payment fees for missing your payments even during such a difficult period.

    Although it may be statistically impossible to find a bank that meets all the aforementioned criteria, you should look for a bank that fulfills most of them and most the important criteria that you consider a priority. Another aspect that is worth mentioning is that banks are not the only ways to get a loan. There are other alternative options to bank loans depending on your specific purpose. For example, say you are looking to buy a HDB flat, you can directly opt for a HDB loan instead of a home loan from a bank or CPF Housing Grants depending on your eligibility for the same. These alternate options for bank loans can help in reducing your loan quantum.

    Also, remember that though unsecured loans seem much more appealing, secures loans have equal number of advantages starting with lower interest rates. It is a fact that what you put down as collateral can be seized by the bank if you defer on the loan, but it is also a fact that hardly anybody applies for a loan with the intention of deferring on the loan. Unsecured loans on the other hand can be beneficial when the loan amount is significantly lesser and the loan tenure is shorter where you can avoid the hassle of putting down a collateral that is worth way more than the loan amount.

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