A loan is a debt instrument that is backed by a promissory note wherein the borrower pledges to repay the lender for the funds borrowed in accordance with the terms of the contract. It is very useful because you can get access to funds without selling or liquidating your assets and can pay back in convenient instalments or in lump sum by the end of the tenure as per your agreement.
If you need a personal loan in Singapore, you can either go for a term loan or a revolving loan because each has its unique benefits.
A revolving loan, as the name suggests, is a loan that doesn’t have a fixed tenure. It gets renewed automatically and your borrowing limit gets reset every time you pay down your due. It’s basically an instrument that lets you drawdown, repay and redraw multiple times throughout the lifetime of the instrument. The best part is that you’ll just have to pay interest for the portion of the total available credit that you have used. There is also greater flexibility in terms of minimum payment and the schedule of payment.
Overdrafts and credit cards are examples of revolving loans.
A term loan is a fixed repayment loan that has a fixed tenor and a fixed instalment as per the agreement. If you don’t make regular payments as per the predetermined schedule, you’ll end up defaulting and affecting your credit rating. The interest rate may be a fixed or a floating one. Just like revolving loans, term loans could be unsecured, in which case the rates are usually higher, or secured, in which case the rates are lower because the loan is backed by a surety – a guarantee or a pledged asset. Home loans and education loans are examples of term loans.
The following table provides a comparative analysis of the two debt instruments:
|Characteristic||Term Loans||Revolving Loans|
|Repayment type||Fixed repayment either in the form of instalments or in a lump sum at the end of the tenure||Revolving throughout the allocated duration|
|Interest||Usually lower||Usually higher|
|Recalled on demand||Usually not possible||The lender may set conditions on minimum payment ceiling or the payment schedule and reserves the right to impose a fine or discontinue the loan if you don’t adhere to the terms of agreement|
|Multiple borrowings||Not possible since the loan amount is predetermined and fixed, and the loan expires at the end of the tenure or once the debt is settled||Throughout the lifetime of the product, you’ll be able to draw, pay back and redraw loans as soon as you settle the dues|
|Purpose||Usually long term||Usually for short-term urgencies|
|Surety||May or may not have||May or may not have|
For choosing a bank or a lender for a term or revolving loan, you can check BankBazaar to get a comparative picture. Getting the right financing is important. If you have an urgent need, a revolving loan or line of credit is better since the application process for a term loan tends to be more extensive. Again, if you have a one-time borrowing need, you shouldn’t apply for a revolving line of credit because the interest rates are usually higher than term loans.