If you find yourself short on cash and need a sum of money to tide you over a short period of time, a personal loan can come in useful. In Singapore, there are a number of ways to get a personal loan, ranging from banks, legal moneylenders or even using your credit card as a temporary credit line. While most borrowers may only focus on the cost of a loan, there are a number of other equally important points to consider before taking up a personal loan. Go through the list below carefully before applying for one!

Fees & Charges

Ever seen an advertisement for a personal loan that says “0% interest rates”? Well, let’s just say that banks are businesses too so there’s hardly any sense to lend you money for no charges. Instead, you’ll pay these fees in a different way, usually through what is called an origination/processing fee. Do note that this origination fee is usually deducted from the loan approved and usually cost between 2 to 3% of the loan amount. Other fees to watch out for include charges for a change of tenor, late payment fees, cancellation fees as well as an early redemption fee if you decide to pay off your loan earlier than expected.

Interest rates

When you look up online for a personal loan, you may be confused by a number of different interest rates the banks use to price their loans. Mostly, you will see two different interest rates, the nominal and the effective interest rate, and you’ll notice that the former is usually lower than the latter. Always remember to use the effective interest rate (EIR) to compare different offers from banks as it takes into consideration the compounding periods and application fees, and provides a better gauge if you are comparing the loan rates across different providers. However, don’t make the mistake of ignoring the annual flat rate. This is what you need to use to figure out what you have to pay each month back to the bank, so you better make sure your monthly budgets can handle it.

Your Credit Rating

You can pretty much get a personal loan rather quickly these days, with some banks promising an approval within 24 hours. However, this is based on the assumption that you have a clean credit record and gives the bank no reason to reject you. So if you want to get any approval, ensure that you have no or minimal history of bad credit records, including frequent late payment of your bills or debts, and not having sent a number of credit applications during the same time period.

Borrow according to your purpose

Ever wonder why there are so many types of loans when you can simply take a personal loan? Would you take up a study loan or use a personal loan to pay for your university tuition fees? Or would you like a balance transfer loan to pay off your credit card debt? This is because specific loans are structured with the purpose in mind, and most of the time, their interest rates are much more competitive compared to using a personal loan. Another key difference is that taking a loan for a specific purpose may not grant you a lump sum of money to use as you wish.

Minimum Tenure

Most banks in Singapore require you to take on a minimum tenure of 12 months for a personal loan, even if you can pay off your $10,000 loan in 6 months. This is to ensure that they get the amount of interest fees from the borrowerer. Paying it off early will then cause you to incur a pre-payment charge. This is why those looking to take up a personal loan need to weigh their different options when they need cash.

For instance, if you only need a small amount of money, such as $2,000, to pay off a one-time hospital bill, it may not be the most economical choice to take up a personal loan and pay it over a tenure of 1 year. In fact, it may make more sense to use acredit card instead.

E.g: Total cost of Personal loan for $2,000 over a 12-month period:

  • Principal amount: $2,000
  • Processing Fee: 2% =  $40
  • Annual Flat Rate: 15% per annum = $300
  • Monthly instalment = $192
  • Total Cost of loan: $$2,340

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

  • Principal Amount: $2,000
  • Annual Flat Rate: 25% per annum = $125
  • Late payment charges:  $60 per month = $120
  • Monthly payment: $742
  • Total cost of loan: $2,225

You can see that the cost of using a credit card will be lower, but that’s given that you are able to pay for a larger monthly payment so that you can clear off your debt at a faster rate.

While a personal loan can be a very useful financial tool to tide you over a period of cash-crunch, do your research to ensure you’ve got the best deal by comparing using the above pointers. You can also find the best personal loan with lowest interest rates in Singapore in ValuePenguin’s analysis in the link.

Written by Lynette Tan

This article first appeared on ValuePenguin

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ValuePenguin is personal finance company based in New York. DJ is responsible for building ValuePenguin’s presence in Asia, from researching personal finance topics in the region to building relationships with financial and media institutions. He previously worked as an investment analyst at leading hedge funds in New York including Cadian Capital and Tiger Asia. His expertise is in the global technology, consumer and financial industries. He graduated from Yale University with a degree in Economics, and speaks Korean, English and Mandarin Chinese.

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