What You Need To Know Before Taking Out A Personal Loan
Sometimes, money is tight and you simply have an emergency expense to take care of, like sudden medical bills that come by like a curveball that your insurance is of little help for. Or perhaps, you have a big purchase that you need some time to pay off, and a credit card’s interest rates will most certainly cripple you.
In some cases, a personal loan may just be what tides you over. Here are some things that you need to know before you decide to take on a personal loan.
What is a personal loan?
A personal loan is an unsecured loan that is issued to individuals for a short to mid term period. Typically, the repayment time varies from one to seven years. Banks do not usually require security or collateral when giving these loans, and neither do they ask for your reasons for taking a loan.
So, no awkward moment there if you want some cash to get higher cheekbones.
When to take out a personal loan?
While personal loans can be taken for just about anything since it’s well, personal, it’s really not wise to take on a loan for indulging on entertainment or shopping purposes, especially when the interest rates aren’t quite attractive.
However, there are some cases, apart from emergencies, when it could be viable. For example, getting a loan for private investment, to further your education and an education loan doesn’t apply, or to cover a large credit card debt.
In the case of the credit card debt, a personal loan is a good option to take if you have somehow managed to accumulate such a large credit card debt that you won’t be able to manage paying off with balance transfers in 6-12 months. A personal loan gives you a number of years to pay off at a lower interest rate (7-15%)than that of credit cards (>24%).
However, that doesn’t mean you can run off into the sunset with uncontrolled spending, knowing you can pay off your debt in years. The MAS has placed a limit on unsecured debt.
By 2019, the limits will be:
- 1 June 2015: If your debt is 24X of your monthly income for 3 months
- 1 June 2017: If Your debt is 18X of your monthly income for 3 months
- 1 June 2019: If your debt is 12X of your monthly Income for 3 months
Where to get a loan?
In general, licensed moneylenders are less sticky with their requirements than banks, though that doesn’t mean they will give you a wad of cash based on your honest good looks. However, as moneylenders tend to specialise in small loans, the moneylender may pass a less than favourable credit score that would normally have you rejected by a bank.
Also, moneylenders can be quicker with their paperwork and approve your loan in less than hour, a plus if you do need urgent loans.
However, one thing to note about moneylenders is that information on interest rates are hard to find publicly, and the only way to be sure is to actually shop around face-to-face.
If don’t have a terrible credit history, it shouldn’t be hard for you to get a personal bank loan. Typically, banks will loan you up to 6 times of your monthly salary, though a higher annual salary (e.g. S$120,000) may enable you to borrow more.
Some banks that offer personal loans with rather generous limit and reasonable interest rates. For example, the HSBC Personal Loan gives you a loan of up to 8 times your monthly salary and loan tenure of 7 years with interest rates of 6.50% – 7.5% per annum.
Other than that, banks also packaged their personal loans with attractive gifts or even cashback! For instance, Standard Chartered CashOne comes with S$100 plus 1.2% cash rebates with no cap according to your approved loan amount. Or, check out the Dash Advance Personal Loan that offers a flat rate of 5% per annum for all loan amount below S$10,000 with 36 months tenure, comes with welcome gifts like Canon 1100D or Samsung GALAXY Tab 3 that worth up to S$799, plus you stand a chance to win the new Samsung GALAXY Note 5!
What do you have to keep in mind?
Taking a loan from licensed moneylenders and banks comes with less fear of red paint and pigs heads at your door. However, there are still some considerations that you need to take into account.
- Total Debt Servicing Ration (TDSR)
This is an important point to note if you are intending to purchase property in the short to mid-term, or are looking at refinancing. The TDSR is an affordability “ratio” that’s meant to prevent you from purchasing a property that’s well beyond your financial means. The TDSR limits the amount of money banks and other Financial Institutions (FIs) can lend you, which is 60% of your gross monthly income minus all of your outstanding debts, and yes that includes personal loans.
Before taking a loan for a purchase that you could really do without, consider keeping your debt ratio in a good state if you want to be homeowner in a few year’s time.
- Fees and late payment charges
Every bank or moneylender will have its own set of late payment charges, as well as annual fees. Some late payment penalties can be pretty significant, like an additional 2.5% above your current interest rate on the overdue amount.
As financial institutions make it easier for you to take out a loan with more varied offerings, quicker approval time, and even freebies, remember that the onus is on you to exercise financial discipline!
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.