Personal loans have become very popular and common in Singapore in the last decade. But what exactly is a personal loan and how does it work? A personal loan is an unsecured loan that is meant for personal usage – this means the bank won’t ask any explanation on what you are using the money for. As these loans are unsecured (meaning the bank does not ask for collateral) the interest rates will usually be higher than those on secured loans (car loans, mortgages, etc.). Another characteristic of personal loans is that they are short term, usually somewhere between 1 and 5 years, which means they are repaid much quicker than a mortgage, for example.
The question that naturally comes next is: if there is no collateral, what are the other criteria that banks look at to determine the loan amount? In Singapore, the banks look at your monthly income and usually determine the amount you can borrow as a multiple of that number. For example, if you earn S$5,000 per month and the bank offers up to 5x you income, you are eligible to borrow up to S$25,000. What about the costs associated with the loan? In addition to the interest rate, the banks usually charge an annual fee, somewhere between S$50 and S$90. Adding the two costs together will show what the total expense associated with a particular loan package is.
When Should You Consider Taking a Personal Loan?
While it might be tempting to take a personal loan to buy a new TV or take a nice holiday, for example, you should really consider whether it is worth doing so. The interest rates on personal loans in Singapore are high (between 9% and 18%) so you will most probably end up greatly overpaying that TV or holiday and regretting it later on. Personal loans are thus not the best way to finance such “entertainment” expenditures.
So when is taking a personal loan a good idea? There are a few occasions where a personal loan can actually help you reduce costs. One of those occasions is called debt consolidation. Debt consolidation simply means taking a personal loan in order to merge more of your outstanding loans into one, usually at a lowest interest rate. Another occasion where you might want to consider a personal loan is to cover a large credit card debt. As credit cards have incredibly high interest rates it makes sense to repay that debt with a loan that provides lower ones in order to save money.
Ultimately it makes sense to take a personal loan for things that will help you generate more income or create savings in the future. In addition to the two reasons mentioned above, other appropriate situations might be acquiring a professional education or investing in an asset that is quickly appreciating in value. If you think you are in need of a personal loan, be sure to compare the personal loans that are on offer by banks in Singapore!
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