• Personal Line of Credit vs Overdraft in Singapore

    A Personal Line of Credit (PLC) is one of the loan options available in Singapore that offers quick cash in times of need. These loans are a great option when you are facing an emergency and need funds immediately.

    Features of Personal Line of Credit

    When a bank approves your personal line of credit, it gives you a certain amount of cash that you can withdraw from whenever the need arises. Your PLC has a maximum limit beyond which you cannot borrow. If you repay the borrowings on time, you may contact the bank and increase this limit if you feel you need more funds. The bank may give you a higher credit limit only if they are satisfied with your repayment schedule. As long as you are in good standing with the bank and you repay what you borrow on time, you can make as many withdrawals and deposits to your credit line as you want. Every time you borrow, you have to pay a minimum amount to the bank each month till you settle all your dues.

    Banks charge an annual fee for your PLC facility. This fee is applicable whether or not you make use of the money available to you. However, you don’t have to pay any interest unless you actually withdraw money. Banks charge interest only on unpaid amounts. Your personal line of credit gives you the flexibility of spending the money you borrow as you wish. Banks usually don’t have restrictions as to how you should use the cash.

    Pros and Cons of Personal Line of Credit

    Pros

    • The Annual Percentage Rates (APR) of personal lines of credit are usually lesser than those of credit cards.
    • You don’t have to pledge collateral since PLCs are unsecured loans.
    • You get to spend the money at your own discretion.
    • Perfect option if you want to borrow money intermittently.
    • You don’t have to pay any interest until you actually start borrowing money.
    • The money is always readily available.

    Cons

    • The APR is subject to change and may increase your monthly payments.
    • The interest you pay is not tax-deductible.
    • You have to pay the monthly or annual PLC fee even if you don’t use the facility.
    • You may get a PLC only if you have a good credit score.
    • Banks charge high interest rates and penalties for late payments.
    • Since the cash is readily available, you may be tempted to spend more than necessary.
    • Not paying your instalments on time can affect your credit rating.

    Points to Remember

    Personal lines of credit are a great way of getting emergency cash. But also keep in mind that they come at a higher cost than some personal loans. Remember to pay off your dues at the earliest to avoid unnecessary late payment penalties.

    Overdraft

    This is a facility that allows you to withdraw cash or write cheques using your current account. An overdraft facility comes with a limit up to which you can draw funds.

    Features of Overdrafts

    Banks usually grant overdrafts for short periods of up to 12 months. You can renew the facility every year. However, any amount you borrow becomes repayable when the bank asks for it. Banks calculate interest on the amount you draw on a daily basis and debit the amount to your account monthly. If you fail to pay any part of the interest, the unpaid portion gets added to your next month’s balance. An overdraft is also known as a revolving credit facility since it allows you to withdraw cash as many times as you want. As long as you repay the amounts and the borrowing is within the maximum limit, the account is reusable at your discretion.

    Overdrafts are available as secured or unsecured facilities. Secured overdrafts require you to place security for the credit limit offered to you. You can pledge your shares, bank deposits, or property. If you are unable to repay the bank when the payments become due, your security is used to settle your dues. Unsecured overdrafts don’t require you to pledge any security. In Singapore, you can get unsecured credit up to a maximum of 4 times your monthly income, if your annual income is S$30,000 or more. If your income is between S$20,000 and S$30,000 p.a. you are eligible for a maximum of twice your monthly income.

    Pros and Cons of Overdraft Facilities

    Pros

    • Money is readily available.
    • As long as your borrowing is within the allowed limit, you don’t have to pay any minimum monthly amount.
    • Joint borrowers are allowed.
    • Flexibility of spending - apply the borrowed amount to any expense of your choice.
    • Make use of the cheque facility to pay directly from your overdraft account.
    • You can repay the borrowed amounts at any time within the tenure of the facility.

    Cons

    • Banks charge penalty interest (higher than the normal interest rates) when you borrow over the specified limit.
    • If you issue a cheque that takes your total borrowing above the credit limit, the bank may return the cheque and will charge a fee for it.
    • Joint borrowers are equally liable for any debt owed to the bank even if one of them has not borrowed or operated the account.
    • The bank can demand you to repay the borrowed amounts at any time.
    • If any amount exceeding the credit limit remains unpaid, the bank can cancel your overdraft and demand immediate repayment of the total amount.
    • Cancellation of your overdraft facility affects your credit score.

    Which Option Should You Choose?

    Both of these credit options are similar in many ways. Both offer ready cash that you can withdraw at your discretion and pay back at any time. You can use the money to pay for any expense you like.However, PLCs require you to make monthly payments and charge an annual fee for the facility while there are no such requirements or charges for an overdraft facility (although the bank can demand repayment at any time). All said and done, keep in mind that both are loans facilities given to you. Any borrowings you make, need to be repaid. Before borrowing make sure that you have the financial bandwidth to repay the amount when it becomes due. If used responsibly, both these credit facilities can help you get urgent cash when you need it.

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