Home Plan Debt How to Choose the Right Loan for Specific Needs
How to Choose the Right Loan for Specific Needs

How to Choose the Right Loan for Specific Needs

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When you need a sum of money, you may get on the internet and start searching for personal loans. But for someone who hasn’t taken a loan before, all the different types of interest rates shown and fees charged can be pretty daunting. Depending on your needs, always choose a specific loan as compared to a personal loan to ensure that you get the best rates.

Unique Features of Specific Loans

Renovation Loan – a renovation loan is useful when you want to spruce up your existing home and needs some extra cash for help. Most banks offer an effective rate of around 5% p.a and you’d need an original quottion from your contractor before application. You can usually stretch up the loan tenor to about 5 years, and the maximum loan you can get is $30,000 or 6 times your monthly income. The bank may give you a number of free cashier orders for free, after which you’d need to pay for them.

As you may know, home renovation costs can range between $20,000 to even more than $100,000. Sometimes, $30,000 will not be enough and you might have to either top up with cash or take on an additional personal loan to ease your cashflow.

Study Loan – for those of us who were not lucky enough to have our parents pay for our tertiary education, you might already be acquainted with taking up a study loan. Study loans are great for students because most of them do not incur interest during your time in school. The interest charges only starts upon graduation, which means that if you are hardworking enough, you could have taken up a holiday job and started saving to pay off part of that loan before it starts incurring interests.

Some study loans also provide additional allowances for students, but remember that taking up more loan just means you need more time to pay off after you start work. Considering that most graduates may take their time to choose their first job, you should be prepared with a sum of money to service the loan when you need to start paying for them.

Car loan – Unlike the renovation and study loan, a car loan is a secured loan. This means that as you take up the loan, your car becomes the collateral in case you default. The loan-to-value ratio is either 60 or 70% depending on the open market value of your motor vehicle, and the maximum tenure is 7 years. The interest rates for car loans are at around 4% p.a currently.

What About Personal Loans?

Compared to the above specific loans, a personal loan offers a lump sum upfront for you to use in any way you want. However, the interest rates are also higher compared to the specific loans. Personal loans are useful when you need to deal with emergencies and need a longer period to pay back.

Depending on your needs, you may consider using a credit card as a “loan”. Why is that so? In fact, a credit card acts pretty much like an interest-free loan for the first 30 days, after which if you do not pay up the card balance, interest charges and late-payment charges start kicking in. If you need a temporary credit line just to ease the cashflow for 1 or 2 months, it may be better to use a credit card instead of a personal loan. This is because the latter usually requires a minimum tenor of 12 months, which means stretching out the interest payments you are making per month as well. However, if you need a longer term financing, then a personal loan is a better choice compared to a credit card because the interest rates are much lower.

When you decide to take up a personal loan, there are a few things you need to consider:

  • loan tenor
  • processing fees
  • effective interest rates
  • pre-payment charges

Before you decide to take up a personal loan, have an idea of how much the loan will cost you, including all fees and charges, as well as the monthly repayments you need to pay for. This will ensure that you can afford the loan comfortably.

This article originally 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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