A personal loan can be a useful tool to meet your short- to medium-term financial objectives, especially when cash is nowhere in sight. However, you probably knew this already. The fact that you have clicked this link and you’re poring over this article right now means you want something more – more value that is!
True that personal loans can be useful. But, advertisers usually leave certain things unsaid and unexplained. For example, a loan can be useful when taken from the right lender and at the right time. Hence, we’ll discuss some benefits and cons that’ll help you evaluate a loan the next time you consider one.Read through the following sections to know more.
How Much Value Can You Expect From Personal Loans?
A personal loan, be it from a bank or a registered moneylender, indeed has some very unique features and advantages. They are as follows:
Flexibility and Choice
In Singapore, these loans come in various types. Depending on your needs, you could choose an instalment loan, a line of credit, a balance transfer account, a secured overdraft, a funds transfer, or a debt consolidation programme. Each of these have their unique benefits. While some let you borrow as and when you require funds, some others offer a one-time lump sum quantum with fixed payments. There are some still that let you consolidate your payments under a single plan and enjoy the convenience of one payment per month. You’ll also enjoy the flexibility of choosing your loan tenure, repayment plan, or mode of repayment. You can even choose your time of exit, although early exit may have some downsides.
Most lenders won’t ask you to pledge a security when you apply for a personal loan. This means you don’t risk losing your valuable assets, unless your debt is massive and the court directs the banks to take possession of your assets to pay for their losses. Secured overdrafts are, however, secured loans. Let’s take the OCBC Secured Overdraft for our discussion. You can pledge your fixed deposits or unit trusts that you hold with the bank and get a loan against them, up to the approved credit limit. The benefit? You don’t have to liquidate your asset(s) to meet the financial emergency. Your assets will become collateral-free as soon as you settle your debts.
Unlike some other financial products and debt instruments, personal loan approval and disbursal are usually extremely fast. You may receive in-principle approval on the same day. The loan amount may be credited to the designated account in 1 or 2 days, provided documents are in order. HSBC Personal Loan is a case in point. The bank claims to offer a 1-minute approval-in-principle, subject to conditions and 1-day disbursal of cash, also subject to conditions. The point that we’re trying to make is that even if your application gets rejected, you’ll find out soon. This could save you time and you can start looking for alternatives quicker. Also, since the wait time from the time of approval and disbursal is low, you can take on your immediate financial emergencies head on.
Multiple Tenure Options
While lenders may allow you to choose a tenure as low as 3 months for some loans (a balance transfer, for example), it could go up to 10 years in some cases (a DCP loan, for example). The tenure for an instalment loan will usually be between 1 year and 5 years. However, in case of HSBC term loans, the tenure can go up to 7 years. This means that you can choose a tenure that completely matches your cash flow and meets your budget objectives.
Interest Rates Usually Remain Fixed
Unlike home loans and some other loans, interest rates on personal loans usually remain fixed for the entire duration of the repayment period. This means that you don’t have to worry about unexpected surges in interest payments. For balance transfers though, the rates may change to prevailing rates after the expiry of the introductory period. However, if you don’t pay interest charges on time, higher rates may be imposed.
Lesser Number of Documents to Handle
Unlike some loans such as home loans and other secured loans that require a slew of documents to get started, personal loans are usually much simpler and convenient. Except for some income documents, all you need to provide is your NRIC or passport, whichever is relevant. The processing time is also much faster in comparison to secured loans.
Flexibility in Terms of Purpose
As the name suggests, a personal loan can usually be used for anything. You can use it to fund certain expenses for your wedding, to take care of sudden fund shortfalls, to fund a foreign holiday, or to pay for your credit card bills. The lenders will, in general, never enquire about the purpose of the loan.
Payment in Fixed Instalments
For most type of personal loans, you’ll enjoy the liberty to repay in fixed monthly instalments. This could make your life easier because you can predict the costs on a per-month basis and make provisions for the same, accordingly.
For lines of credit, overdrafts, and balance transfers, you can pay as little as you want and whenever you want. Whenever you pay, a portion of credit equal to that amount will be restored. So, you can continue to revolve your credit and draw from the same credit line multiple times.
What Else Should You Keep in Mind?
While we’re confident that we have laid out the advantages quite clearly for you to see, we would recommend some circumspection. Here are a few things that you should thoughtfully consider before you submit a personal loan application:
Interest Rates Tend to Be on the Higher Side
Most lenders charge between 10% p.a. and 15% p.a. interest on personal loans since they are usually unsecured in nature. This is assuming that you haven’t defaulted, missed payments, or invoked other penalties. In such situations, additional rates may apply. Even for a balance transfer with which you could enjoy interest-free borrowing, interest rates may go up drastically after the end of the promotional period (usually to the credit card’s prevailing rates). Hence, you need to be careful about your interest payments. Also, try to make use of promotional deals that offer special discounts on interest rates, fee waivers, and more.
Impact on Credit Score May Not Be Good
Have you got too many open credit facilities? Have you amassed too much debt? Have you been making too many enquiries about credit? All these could negatively impact your credit score. A lower score means lower chances of borrowing in the future. It could also mean higher interest rates, additional charges, and ineligibility for special deals.
Partial Repayment May Not Be Possible
Some lenders don’t allow partial repayment of a loan. Take DBS for example. You can’t make a partial prepayment on their Personal Loan. Even if you wish to make a full repayment before loan maturity, you’ll still have to pay an additional fee.
Be Ready to Go Through an Ordeal If You Default Too Often
Different banks have different loan collection techniques in place. While the government will protect your interest, it will also try to ensure that the lender doesn’t face a loss. The lender will also have the right to choose the legal route. If your incompetence as a borrower is proven in court, you can be asked to pay the dues or lose possession of valuables that you own. These loans are not completely risk-free after all.
Taking everything into consideration, it won’t be wrong to suggest that a loan like this could be of great help for you if your purpose and intentions are right. You’ll, however, have to be meticulous with your research, if you wish to choose the right loan and enjoy the sweetest fruits of it. If you start early, you may be able to parry your financial worries. Don’t let it go out of hand.