What Should I Consider Before Taking Up A Personal Loan?

Once in a while, you may find yourself short of cash to fulfill your current or short-term needs, and a personal loan might be your best solution.

Why a personal loan? It’s a temporary loan that is meant to meet your temporary needs. It’s also available from several lenders in Singapore, including banks and licensed moneylenders. You have more options for your personal loan.

However, it is worth noting that not every loan that comes easy has the best features to your advantage. Many borrowers focus largely on interest as the major cost of a loan. But there are so many other factors that you should put into consideration before signing up for a personal loan. You need to know the key factors to consider before getting up a personal loan.

These considerations are as equally important as the issue of interest rate. We will take you through each one of them before committing yourself. But before we even get there, do you understand well what a personal loan is?

What is a Personal Loan?

If you already know what a personal loan is and how much you can borrow, please scroll to the third point.

A personal loan in Singapore is considered to be a short-term to medium-term loan when you consider the loan durations offered by different lenders in Singapore. This means, depending on how much you earn, you can borrow more for longer periods or less for a shorter period. Another good experience with personal loans, unlike payday loans, is that it is payable in equal monthly installments until it is cleared.

With other loans, the funds are channeled to another party to pay for what they were requested for, such as mortgage and car loans. However, with personal loans, the money is credited to your account. It’s considered ready cash in your account.

This type of loan is offered by a number of legal loan lenders in Singapore, including credit unions,  banks, and licensed moneylenders. This loan is also ideal for personal expenses, medical expenses, starting a business, or even consolidating your existing debts.

Lastly, personal loans are not cheap and should only be taken when all other alternatives are exhausted. The reason for being costly is because they are generally unsecured, making them perceived as high-risk loans. But even if that is the case, it is the best personal loan for many borrowers as they can’t afford to provide collateral for cheaper loans.

How Much Can I Borrow for Personal Loans?

As a basic rule for any loan, including a personal loan, your ability to pay the monthly installment is the primary determinant. Hence, you should limit the amount you can borrow to your ability to manage the monthly installments.

That said, the only way you can borrow a given amount and pay a lower installment is by taking a long tenure. Be advised, however, that long tenure may keep your monthly costs down, but in the end, you will pay more interest to your lender.

In Singapore, you can borrow any loan amount. But for unsecured loans, the amount you can take across all moneylenders is regulated and also varies from residents and foreigners.

The table below shows the maximum amount that you may borrow from all moneylenders in Singapore at any time:

The above amounts are the maximum amounts, but you are not guaranteed to get an approval of the same amounts. Your money lender can legally reduce the amounts set by having more stringent eligibility criteria.

In order to make loan inquiries easier, most money lenders have a Personal Loan Calculator on their online platforms for your assessment.

How a Personal Loan Calculator Works

A Personal Loan Calculator enables you to get an accurate amount you can borrow after entering the required variables such as loan amount, income, loan tenure, and citizenship as accurately as possible. By adjusting the loan tenure, you will find the loan amount and the most comfortable monthly repayment amount.

A personal loan calculator gives you an overview of how much you can borrow and if you are able to handle the monthly loan repayments.

Things to Consider When Applying For a Personal Loan

A personal loan is a sure way of getting the cash you need to sort out your temporary financial problems. However, before you put a pen on that agreement, it’s important to consider a few things:

1. Loan Purpose

Have you ever wondered why there are so many different types of loans when you can just get a personal loan? To pay for your new car, would you take out a study loan or a personal loan? Are you looking for a way to remodel your home? Or do you want to pay off your credit card debt with a balance transfer loan? One reason for defaulting is the utilization of a personal loan for the wrong purpose.

Specific loans are designed with a specific purpose in mind, and their interest rates are usually much lower than those of a personal loan. Another significant distinction is that taking out a loan for a specific purpose may not provide you with a lump sum of money to spend as you see fit.

2. Type of Interest Rate

You might be confused by the various interest rates that banks use to determine the cost of their loans when searching online for a personal loan. There is the simple and effective interest rate, where the nominal or flat interest rate is usually lower than the effective interest rate.

Always compare loan rates offered by several lenders using the effective interest rate it takes into account compounding and application fees. However, don’t overlook the annual flat rate, as this will help you calculate how much you must repay each month.

3. Fees & Other Charges

There are no free loans, and even those advertised as zero interest have a way of earning income for the lender in terms of fees and charges. These loan costs come in different terminologies, such as loan processing fees.

Your lender earns this processing fee in advance by deducting it from the approved amount. Some lenders usually charge between 2% and 3% of the approved amount. Licensed moneylenders in Singapore are not allowed to charge a fee of more than 10% principal loan amount when the loan is granted. The maximum monthly late repayment charge is also set at $60.

Other fees to consider include change of tenor fees, late payment fees, cancellation fees, and even early redemption fees for clearing your loan before the tenure ends.

4. Credit Scoring

Many people believe that their credit score is only important when applying for a home loan or a car loan. However, your credit score can have an impact on your ability to obtain a personal loan. A personal loan is usually unsecured, meaning that you will not be requested for collateral.

As a result, lenders consider personal loans to be riskier than other types of loans. Banks typically require borrowers to have a good or excellent credit score to mitigate this risk. If you intend to apply for a loan, you should first check your credit rating from CBS. You’ll know what to expect and will be able to work on improving your score if necessary.

5. Minimum Loan Tenure

Even if you can clear a high loan amount in six months, most banks in Singapore will approve your personal loan for not less than 12 months. This is done to ensure they receive the maximum interest from your loan.

If you pay it off early, you will be charged a prepayment penalty if you pay it off early. This is why when considering a personal loan, you should weigh your options before taking the You not be as cost-effective as swiping your credit card, which you can repay at any time.

Let’s view the following example: You only require a small amount of cash, say $2,000, to pay off a one-time hospital bill.  You can take a personal loan and repay it over a year. You also have the option of using your credit card. You need to consider which is the most cost-effective option.

Option 1: Total cost of Personal loan of $20,000 for a 12-month period

Principal amount: $20,000

Processing Fee: 2% = $400

Annual Flat Rate: 15% per annum = $3,000

Monthly installment = $1,920

Total Cost: $3,400

Option 2: Total Cost of using a credit card for $20,000 over 3-month period

Principal Amount: $20,000

Annual Flat Rate: 25% per annum = $1,250 for 3 months

Late payment charges:  $60 per month = $120 for maximum 2 months

Monthly payment: $7,084

Total cost: $1,370

From the above: The cost of using a credit card will be lower, but only if you can afford a larger monthly payment so that you can pay off your debt faster.

6. Know Your Lender

Before applying for a loan in Singapore, it’s prudent to conduct due diligence on the licensed moneylender or bank so as not to get involved with loan sharks. Always consider taking a personal loan from legal entities, such as licensed moneylenders and banks.

You should also consider all available options when taking a personal loan, as not all lenders are the same. Some will provide a lower interest rate, while others may offer more flexible repayment terms.

Before signing the loan agreement, ask your lender to walk you through it in detail.  This will assist you in establishing that your lender doesn’t have a clause for charging what would otherwise be hidden fees.

The Bottom Line

When taking a personal loan, you should understand that you are signing a contract that will last from one to a few years. It is a legal contract. Making good use of the loan amount won’t make you regret it in the long run. Most importantly, select a personal loan package with comfortable monthly repayments.

Also, consider other terms of the loan that might surprise you, including additional fees and penalties applicable in case of default.

On the other hand, avoid taking out a loan for a long period as you will pay too much interest. Furthermore, if you need to repay the personal loan sooner than expected, ask whether you will be charged an early settlement fee.

Do you have other questions on personal loans? Loan assistants at CreditMaster can answer your questions.