5 Things to Look Out for When Applying for a Personal Loan for the First Time

From interest rate to credit score and TDSR, there are many moving pieces that impact your personal loan. Borrowers should pay attention to these five things when applying for a loan, especially if it’s your first time. 

A personal loan is a helpful tool in managing cashflow and facilitating big-ticket purchases. Before you apply for one, it’s important to know the different features of personal loans, and the potential implications they carry. 

Here are five things to look out for when applying for a personal loan for the first time.

1. Interest Rate 

The foremost thing to pay attention to is the interest rate. You will typically see two sets of figures displayed, such as:

• Interest rate: 4.38% p.a. (EIR 7.62% p.a.)

The first figure is known as the advertised rate, but it is the second figure – EIR, or Effective Interest Rate – that you should take heed of.

That’s because the interest charged on the loan isn’t the only cost you have to take into consideration. There are also fees and charges applied on your personal loan; we’ll go into more detail on those later. 

Because the EIR takes into account applicable fees and charges, as well as the advertised loan interest, it therefore provides a better view of your cost of borrowing.

That’s not to say that the advertised interest rate is a lie. It’s simply because personal loans are calculated using the flat rate method, in which interest is charged on the entire loan principal. This results in an attractively low figure, great for marketing purposes. 

One more thing. The advertised interest rates are just that – advertised – and they are not binding in any way at all. You may end up being offered a much higher interest rate, depending on your credit worthiness, as discussed further in the article.

2. Loan tenure

The tenure of a loan refers to the duration over which you pay off your loan. You can typically choose loan tenures of between one to five years (in 12-month blocks) with HSBC the only lender that allows up to 7 years tenure for personal loans. 

The loan tenure doesn't just affect how long you will be servicing your loan. It is the core determinant of how much you have to pay each month, so choosing the right loan tenure is crucial. 

A shorter loan tenure means higher monthly payments, while a longer loan tenure means lower monthly payments. You will want to aim for the sweet spot – monthly payments that are not too high to be unmanageable, with the shortest loan duration possible.

You can use an online personal loan calculator at bank websites or loan comparison websites to help you determine a suitable loan tenure.

3. Fees and charges

Personal loans also come with different fees and charges, which you should note as they increase your cost of borrowing. 

The following are three of the most common fees charged on personal loans; some of these fees may be waived at the discretion of the lender. Also, do be aware that other types of fees may be applicable. 

Admin fee

Also known as a processing fee, this fee is levied for attending to your loan application. 

It is only charged if your loan is approved, and the amount is deducted from the loan disbursed to you. So for instance, if the admin fee is 1% of the loan amount, and you borrow S$10,000, S$100 will be deducted, and you will receive S$9,900. 

Admin fees can be a fixed amount or a percentage of the loan amount. The former represents a higher cost of borrowing to those who borrow small amounts, while the latter is a more equitable method.

Late fee

Personal loans are structured to be repaid over a predetermined number of instalment payments, with one instalment due by the same date each month.

If you fail to make the payment for the month, whether partially or in full, you will incur a late fee. There are two parts to this fee: a fixed-amount late charge, and late interest, calculated on the overdue amount on your loan. 

Hence, continuously missing your payments or failing to make them in full, will cause you to rack up late charges that can wreck havoc on your budget. 

Early repayment fee

Even though personal loans have a fixed tenure, you have the option to repay your loan early. You can do so by paying off the outstanding balance on your loan in one lump sum.

In addition, you also have to pay an early repayment fee, which varies based on how much of your loan you have paid up. 

By paying your loan off early, the bank loses out on the interest charged on future instalments. Hence, the early repayment fee is to help make up for that. 

This may seem counterintuitive and annoying, but don’t let that stop you from redeeming your loan early if you can. Afterall, it’s always better to have your cash flow freed up as much as possible, so that you can better meet other financial needs. 

4. Credit score

If you’ve not been the most vigilant about paying your credit card bills on time, your credit score will be affected. This can, in turn, cause the bank to assign you to a higher interest bracket, due to the heightened risk of default. 

Also, should your credit score fall below a certain grade, your loan application could even be rejected altogether.

It works the other way as well. If you have been paying your bills promptly, your credit score will be maintained at a high level. This will qualify you for more favourable interest rates, which means you’ll pay less interest overall. 

The bank will initiate a credit score check upon receiving your loan application, and you can ask for a free copy of your credit report from your bank. You can also order your credit report directly from the Credit Bureau of Singapore, but there’s a small fee payable if you go this route. 

Why might you want to purchase your credit report on your own? Well, your credit report will contain important data about your creditworthiness that impacts your loan application. It will highlight problematic areas, allowing you to take steps to redress them. 

In this way, you can preempt any potential obstacles in your loan application, and increase the likelihood of accessing better interest rates.

Having said that, know that the interest rate offered to you is solely at the discretion of the bank. Having a good credit score helps, but is not a guarantee.

5. Total Debt Servicing Ratio

Your Total Debt Servicing Ratio (TDSR) is a measure of how indebted you are, and governs how much you can borrow. 

Under TDSR rules, the total amount of debt repayments each month – including the loan being applied for – cannot exceed 55% of your gross monthly income. 

This means that if your TDSR is near its limit, you may not receive the full loan amount requested. 

Also, not that besides credit card balances and personal loans, car loans, education loans, renovation loans and mortgages also count towards the limit. Hence you need to first take stock of your existing debt obligations, and plan your personal loan application accordingly.

You can also try to make more space in your TDSR by paying off any existing debt you can, before applying for your personal loan. 

And TDSR notwithstanding, know that each individual is only allowed to accrue debt equivalent to 12x their monthly income at any one time. 

That’s why it’s a good idea to update your bank as your income increases; doing so will prevent yourself from being snagged by this rule. 

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