What you think you might know about personal loans might not be true. Find out to see if you’ve been believing in a personal loans myth.
There are 3 schools of people in this world: the first who are frightful of all financial products, the second believe that personal loans are a lot better than credit cards, and the third who understand how to maximise each product as a financial tool.
Good on you if you use each product as a tool for your financial well-being. But if you feel like you fall into either one of the first two groups, we encourage you to read on.
Personal loans, like credit cards, are often misunderstood in their purposes. Here are 6 personal loans myths that Singaporeans should stop believing:
1. Personal Loans are Only for People Short in Cash
This is not true in many cases. Singaporeans take out personal loans for all sorts of reasons, besides being short on cash. In fact, a lot of wealthy people take out personal loans so they still have with them cold, hard cash on hand that they can use for other purposes, such as investments.
Personal loans can come in handy for debt consolidation, avoiding high-interest rates on cash advances, and avoiding insurance claims.
2. A Personal Loan Will Only Put Me in Debt
The only way a personal loan will put you in debt is if you’ve missing a few monthly repayments and you can’t afford to pay them all back.
Before you even apply for a personal loan, think about how much you can afford to pay back monthly. Then, calculate the loan tenor it would take to make these repayments comfortably. Don’t try to shorten your loan tenor if you can’t afford it. Missing a repayment will only incur late charges that you should avoid at any cost.
If you’ve never applied for a personal loan, read these tips on what you should prepare for.
3. I Should Always Get More Cash Than I Need
While personal loans can come in handy for certain purposes, it’s definitely not advised for you to take out more than you need. Think about it: do you really need that extra S$1,000 that the lender will charge you an effective interest rate (E.I.R.) of 9% per annum onwards?
Why would you want to pay extra cash on interest for borrowing S$1,000 that you don’t need?
4. I’m Already in Debt. Why Do I Need a Personal Loan?
As mentioned earlier in point 1, personal loans can come in handy for debt consolidation. If you owe money on multiple credit cards—each charging an interest rate of 24% per annum—you can take out a personal loan to pay off all these debts at a lower interest rate.
Always compare personal loans to find the one with the lowest E.I.R. (which is the interest rate per annum including other extra charges and fees). This way, your existing debt is a lot more manageable to pay off.
5. Personal Loans are Better Than Credit Cards
There are Singaporeans who believe that loans are a lot better than credit cards because of the fixed monthly repayments. While it is entirely up to them on how they would like to repay their loans, it’s not the cheapest way to borrow money.
Credit cards, unlike personal loans, have a grace period where you’d not be charged any interest on the amount you’ve borrowed so long as you pay your bills on time. If used appropriately, you’ll never have to pay a single cent on interest with a credit card.
6. I Should Turn to a Moneylender If I Don’t Meet the Minimum Income
Most banks advertise a minimum income of S$30,000 annually (higher for foreigners) in order for an applicant to qualify for a personal loan. But many local banks offer their personal loan products to locals with a salary of S$20,000 annually and above, such as the OCBC Fixed Repayment loan. So before you run off to a moneylender that would charge you exorbitant interest rates, ensure that you’ve done your homework and spoken with bank representatives.
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By Jehanne Teo
Starting out as a lifestyle writer, Jehanne currently writes for SingSaver.com.sg about saving money in everyday situations.