The drive to get a personal loan in Singapore is on the rise. This is because of the way an individual’s financial situation can be uplifted if only the personal loan has been approved. The challenge is that most borrowers will always find themselves in a far worse situation than they were in before they went for a loan. This is all dependent on the type of loan option that they decided to go with and maybe taking the loan at a very early stage or probably at a very late stage. Some of the jargons that are used in personal loan brochures or foams offered by licensed money lender are very confusing they are more enticing than explaining which also increases the after effects of obtaining a personal loan.
Today we are here to explain to you what a personal loan is, the types of loans available and what you should consider before applying and accepting that personal loan.
What is a personal loan?
A personal loan is also called an unsecured loan because it is not backed by any collateral, such as your home or car, which is the case with other loans such as mortgages or auto loans. Since these loans are unsecured, the bank tends to turn a blind eye to whatever activity you will carry out when you get the loan.
The downside of this kind of loans is that the interests rates charged on unsecured loans are always higher than that charged on secured loans (mortgages, car loans, among others). More so, personal loans are characterized by their payment timeline; the payment period is always very short and it is always between 1 and 5 years at the most meaning they are paid back quicker than mortgages which can take you up to 25 years to repay back.
Unlike other loans i.e secured loans which need collateral such as title deeds e.t.c, a personal loan does not need collateral. Therefore, the question then is what do banks use to evaluate your repayment ability to decide how much they can loan you?
In Singapore, banks look out for your monthly income (meaning if you need to your loan application to be approved faster the safest place is your bank) and thus multiply your loan amount by that number. For instance, if you did earn S$3,000 per month and the bank decides to offer you four times your salary then you’re definitely worth S$12,000. This loan also comes with bank charges which most applicants do not ask about. These charges are in the rage between S$50 and S$90. Putting these together will give you a clear picture of the costs associated with this loan package.
Types of Unsecured loans in Singapore
- The personal installment loan: This is a type of loan that gives a borrower access to a lump sum of cash which is supposed to be paid back every month. In Singapore, this is the loan most people go for and therefore, most common option
- The credit line: This helps you to borrow from your line of credit. And your only obliged to pay interest on the amount and duration you have been withdrawing. After paying back the loan, you do not pay back anything until you decide to apply for another loan from your lender
- The balance transfer loan: With this type of loan one can transfer all his/her outstanding loans into one pool. In some instances, a borrower is even given a grace period between 6 and 12 months in which they are not charged any interest? This helps you to consolidate your debts into one manageable account
Why should you as an individual consider applying for a personal loan?
It is quite tempting to take up an unsecured loan in order to furnish your house such as buying a TV screen, or a fridge or a nice sofa or even taking up that nice vacation in the exclusive beaches or towns you have been dreaming of, but you should consider if it is really worth it.
In Singapore, the interest’s rates on personal loans are quite high compared to other kinds of loans. Attached to them, is an interest rate of 9% and 18%. Therefore, you probably would have overpaid for that TV set, Sofa set or that exclusive vacation. That is to say, personal loans are not the best alternatives to paying for that dream entertainment.
One should ask then, when is it a good time to take up that personal loan? There are many things one could want to do that can be an encouragement to apply for that loan. One of these occasions is consolidating debts economists call it “debt consolidation.” This involves taking up an unsecured loan in order to combine more than one loan into one, most cases paying both at a low-interest rate.
Another occasion is to cover your accrued debit card debt. All over the world, credit cards have awfully high-interest rates and Singapore is no exception. To any person obtaining a personal loan with slightly lower interest rates to pay out one with high-interest rates is a good bargain that would save you money.
For any wise folk, however, it would be a very good decision to sit down with a financial adviser to assess your financial situation before applying for a personal loan. Or else, get an unsecured loan in order to indulge one in things that will create an extra income in the future. In addition to the two above progressing your career further through attaining a higher education on investing in an asset that has the potential of appreciating in value such as bitcoin in today’s world, shares in a company that shows potential growth or even government bonds can also be a very good option.
It is wise to compare different banks and the options that they give you on the table such as the flat interest rates, Loan terms, total monthly payments, total monthly principal payments, total interest payments, hidden jargons and so on in order to determine which bank will give you the best option that will not leave you stressed.