Should you or should you not take out a personal loan? Here are 5 vital things to look out for.
Taking a personal loan can be an intimidating prospect for first-timers. This is actually a good thing, as you should think things through carefully before taking one. A loan is a serious commitment, and how you behave with it could impact your financial reputation. So before taking one, be sure that you’re clear on why you need it.
1. Are You Certain You Can Repay the Loan?
The first consideration is whether you are able to repay the loan. This is not just a question of whether you have sufficient income, but how comfortably or safely you can live with the obligation of loan repayments.
A simple way to do this is to measure the repayment amount relative to your income. In general, you should avoid taking a personal loan if repayments would exceed 30% of your monthly income.
So if you earn S$5,000 a month, your loan repayments should not exceed S$1,500 a month. Do remember that you should still save while making repayments (or else you may end up needing a loan again).
2. Is it the Cheapest Loan for Your Purpose?
The more specific the type of loan, the cheaper it usually is. For example, an education loan or renovation loan tends to have lower interest rates than a personal loan. Always check to see if the bank has a specific loan type for your needs.
The second step is to look for the cheapest personal loan. Most of them range from 6 to 8% interest per annum. However, there are some deals that are cheaper.
One example is the 5% interest loan on offer by Dash, a mobile banking brand created by Standard Chartered and Singtel. You can also occasionally find loans that charge no interest for a fixed time period (e.g. 0% interest for the first three months).
If you borrow S$5,000 for a loan tenor of 36 months
|Product Name||Flat Interest Rate p.a.||Calculation||Total Interest||Total Repayment|
|Dash Advance Personal Loan||5.0%||5.0% x S$5,000 x 3||S$750||S$5,750|
|UOB CashPlus Personal Loan||7.6%||7.6% x S$5,000 x 3||S$1,140||S$6,140|
|OCBC Fixed Repayment||15.0%||15.0% x S$5,000 x 3||S$2,250||S$7,250|
You can use SingSaver.com.sg’s online tools to find the cheapest personal loan.
3. Is the Repayment Process Convenient?
How will you make repayments? Do you need to send cheques, respond via the mail, or can you use AXS machines and ATMs?
This is important if you are often out of Singapore. You will want to ensure repayment methods are convenient, so that you will not accidentally incur late fees if you use a slow method. You should also consider the benefits of some repayment methods–for example, the AXS station sometimes gives out freebies and lucky draws if you can use it for repayment.
4. Have you Weighed Up the Importance / Urgency Balance of Your Purchase?
An urgent matter is not the same as an important one. A three-day sale makes your purchasing decision urgent (you have a time limit to act), but it is still not a life-or-death level of important. Buying insurance is important, but it is not urgent (you don’t have to make up your mind to buy immediately).
If your purchase is urgent but unimportant, you should consider avoiding the loan. Forego it for now and in future, make regular savings so you will have money when you need it.
If your purchase is important but not urgent, consider saving up for it instead.
5. Can You Understand the Terms and Conditions?
Loans may have conditions such as prepayment penalties (fees imposed when you try to make repayment early), interest rate adjustments after a certain period, or extra costs for late payment. Likewise, note that most instalment loans are repaid differently from revolving credit–there is a fixed amount that you must pay, as opposed to variable repayments with a minimum.
Never take a loan when you do not understand the terms and conditions.
Finally, never take a personal loan from a licensed moneylender when you can get one from a bank.
Licensed moneylenders can charge you nigh extortionate interest rates (up to 48% per annum), and often include “trap” clauses such as late fees that cost thousands of dollars.
Whenever possible, get your loans from a reputable bank.
So if the answer is yes, you should get a personal loan, you should compare a few products before you apply. If you’re not in need of a personal loan, follow us on Facebook for more money hacks.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.