This article originally appeared on ValuePenguin

Most people with a traditional approach to their finances may think that they shouldn’t borrow money to go on a holiday. Being financially conservative usually means that, while taking a loan for buying your own home or a car is acceptable, borrowing to fund an overseas trip would be frowned upon. However, there are a few instances where doing so could be justified.

First and foremost, you should already have a decent financial standing: if you have a good amount of income compared to your normal level of expenditures and if you are without much debt, taking out a personal loan to make a holiday of your dream happen shouldn’t be too bad of an idea. Secondly, this is especially the case if you are planning your honeymoon; for a once-in-a-lifetime event, spending a few thousand dollars more can be worth a lifetime of amazing memories, as long as you can safely handle paying back your loan over time.

Luckily, a personal loan is a decent way to finance your vacation if you don’t have enough savings because its interest rates are quite low compared to other possible sources of funding like credit card debt or a loan from a money lender. But, you shouldn’t just sign up for the first personal loan that you find on the internet.

Compare the Correct Interest Rate

A bank will always provide you with two types of interest rates on the same personal loan. The first is the “flat rate,” which you can use to calculate the annual (and monthly) interest that you have to pay on your loan. However, this rate does not permit you to compare loans that have different tenures.

To explain this concept further, assume that you are offered a flat rate of 6% for personal loan tenures of 12, 24, 36, and 48 months. While their flat rates may be the same, their effective interest rates will be different because EIR accounts for the impact of processing fees as well as your principal repayment schedule. Because your interest payment does not decline as you repay your principal, the total amount of fund that is available to you throughout a loan’s tenure is actually only about 50% of the total principal on average, and therefore the loan’s EIR tends to be higher than its flat rate. The following table illustrates this concept assuming a loan of S$10,000.

TenureMonthly instalmentFlat rateProcessing FeeEffective interest rate
1 Year8836%3%18%
2 Years4676%3%15.3%
3 Years3286%3%14%
4 Years2586%3%13.3%

When selecting a bank, you should always compare its effective interest rate against other offerings, since this reflects the true cost of your loan. If you only know a loan’s flat rate, you can use this calculator to convert a flat rate to an effective rate.

Look for Loan Promotions

Personal loan interest rates vary across different banks, and you should be able to find the best promotional deals on this loan if you shop smartly. For example, HSBC, UOB and Citibank are all waiving their processing fees for personal loans currently. Not only that, some of them are offering either extremely low interest rate and/or extra cash rebate, as to make their offerings particularly attractive. If you are looking for an easy way to compare these loans, we’ve already analysed all of the offerings in the country to help you find your best personal loan.

Start your search early

Although many banks advertise 1 hour to 1 day approval for personal loans, sometimes it could take up to 2 weeks to get approval and receive the funds to your account. Therefore, it is advisable to begin collecting details of the terms and conditions that different banks are offering several weeks before your planned trip, so that you can get your money in the bank in time for your trip.

Keep the loan amount to a minimum

While a personal loan can help you afford a holiday that you otherwise may not be able to enjoy, you should only borrow the amount that you absolutely need. In fact, you should avoid getting as much personal loan as you can just because you want to splurge on your holiday. Your loan amount should not be determined by the maximum sum that the bank is willing to lend you; it should be based on how much you need and how much you are able to repay over the course of next year or two. Not adhering to this rule could result in 1 week of luxury and years of hellish pain as you bend over backwards to repay your loan.

A personal loan makes it easier to plan your finances

This form of borrowing has several distinct advantages. You can get exactly the amount that you need and repay it with a fixed monthly instalment over a pre-determined number of months. Because your monthly payment is fixed, you can easily plan ahead on how much to spend and save even before you get the loan. By doing so, you can avoid being late on a payment, which could lead to a large late payment charge in addition to additional finance charges at a punitive rate of interest. Sure, a better holiday with some extra funding can really help improve your life temporarily, but it is important that you understand how personal loans work and take out some time to find the best personal loan offers that are available from all the major banks in Singapore.

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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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