Although sometimes mentioned in the same breath as personal loans and balance transfers, a Line of Credit (LOC) is a financial product that is still relatively unfamiliar among Singaporeans. Like credit cards, a LOC is a type of unsecured product which can help consumers meet their financial needs.
However, that’s where the similarities end. A LOC has distinct features that differentiate it from the other two financial tools, and knowing what the differences are will help you to understand how to use a LOC if you ever need to borrow money for any reason.
But first off, a few things to note before applying for a LOC. While they do offer benefits, they are best wielded by the financially savvy. Especially so when banks roll out attractive promotional rates: these can be very helpful, but only if you know how to use the product correctly.
What is a Line of Credit?
A Line of Credit is a credit facility offered by banks where interest is charged on only the amount you withdraw from this facility. The maximum amount for this credit facility is typically 4 times your monthly income.
The amount you withdraw from the facility is subject to daily interest charges, and there are also fees charged for opening a credit line as well as annual fees charged for maintaining the account.
Any amount you draw from this facility counts towards your unsecured debt limit, which is currently capped at 12 times of your monthly income.
Three Advantages of a Line of Credit
1. Flexible cashflow solution
The first advantage of a LOC is that it provides you a way to better manage your cash flow through periods of high expenditure and/or unstable income.
You see, in personal loans and balance transfers, the credit amount allocated is fixed per application. If you require more credit, you’ll have to make another application, and keep track of two separate borrowings.
However, for LOCs, the credit allocated to your account can be used at your discretion, allowing you to flexibly draw down the amount you require as and when you need. If you don’t draw any money from your Line of Credit account, no interest is charged at all. Also, all your transactions are recorded in a single account, which makes it easy for you to keep track.
Additionally, LOCs allow you to convert the amount you owe into a balance transfer or a personal loan, providing a larger range of repayment options and schedules.
2. Flexible repayment terms
The second advantage of a LOC is flexibility in repayment. You can repay your LOC at a schedule that fits you, and clearing your debt quickly won’t subject you to early repayment fees (unlike personal loans).
When dealing with a large loan, you may find the fixed repayment schedule of a personal loan easier to cope with. If that’s the case, know that LOCs also offer the flexibility to convert your debt to a fixed-term personal loan.
Meanwhile, a balance transfer can also be used to meet an unexpected need for extra funds, but must be paid back during the repayment period (which can be as short as 3 months) if you want to avoid high interest payments. For this reason, a LOC might be a better alternative.
3. Lower interest rates
At around 20% per annum, a LOC offer lower interest rates than credit cards, which typically charge around 28% per annum. While LOC interest rates aren’t as low as some personal loans or balance transfers, they nevertheless offer greater repayment flexibility, which certain types of users (say business owners) may find more valuable. But don’t forget that you can always lower your LOC interest rate by converting your debt into a personal loan.
Introducing UOB CashPlus: Zero interest, zero processing fees
If you’re still reading this, you’re probably interested in a line of credit. Well, great, as we might have the right product for you.
UOB’s line of credit product, UOB CashPlus, has all the benefits of LOCs discussed above, and then some.
For starters, it’s a 0% interest loan for the first 3 months (for new UOB CashPlus customers who sign up before 31 Dec 2019), making it the ideal instrument for those seeking a short-term loan, absolutely interest-free.
It also comes with zero processing fees (for new UOB CashPlus account sign-ups before 31 Dec 2019 only), giving you further savings over balance transfers, which charge processing fees of between 1.38% to 4.5%.
Notwithstanding the above, there are annual fees involved for maintaining a line of credit account, which typically ranges between $60 to $120 per annum. For UOB CashPlus, you should expect to pay $100 per year in annual fees.
The maximum credit limit offer is up to 6 times your monthly income (4 times if your monthly income is between $2,500 to $10,000 a month).
Additionally, you will also receive a UOB CashPlus Visa Card, which entitles you to 1.5% cashback (capped at $50 per month) on all spend, with no minimum spend. Over three months, you can earn up to $150 in cashback, which gives you that little bit more extra savings.
After the first three months, a high interest rate of 19.98% per annum (or 0.05% per day) kicks in. At this point, if you’re still short of funds, it may be worthwhile to convert your loan to a UOB Personal Loan.
Flexible repayment options
So what happens after the initial interest-free period of three months?
UOB CashPlus offers two repayment options.
Flexible repayment: This option lets you pay off your loan at your own pace, which is ideal for users with incoming funds on the horizon. There are two tiers of payments to note here. If your outstanding balance is between $30 to $1,200, you need to make a payment of at least $30 for the month. For amounts over $1,200, you’ll need to pay at least 2.5% of the outstanding amount, plus any applicable excess.
Incidentally, UOB CashPlus’s minimum repayment rates are lower than credit cards, for which you have to pay at least $50, or 3% of your outstanding, whichever is higher.
Fixed repayment: After the first three months, you can also convert your outstanding LOC balance to a UOB Personal Loan with loan tenor of up to 5 years. Doing so can lower your interest rates to 4.25% per annum (effective interest rate as low as 8.21% per annum).
How to use UOB CashPlus to your benefit
Now that you have a thorough understanding of UOB CashPlus and how it works, here are some ideas on how you could use it to maximise its free 3-month interest free CashPlus promotion.
- Purchase of home appliances/home renovation: With New Year coming around, (and Chinese New Year in January!), your home may need a little sprucing up. Your aircon, fridge, computer or other major household appliances have seen better days and you can use UOB CashPlus to replace them, knowing your annual bonus will be paid in the next 3 months.
- Weddings/major expenses: Have a wedding coming up? Bank on UOB CashPlus to help pay for the milestone expenses. Once the celebrations are over and you feel a little settled in after the wedding, you’ll have time to pay off the loan within the interest-free period.
- A holiday: Need a holiday but don’t quite have the cash at hand? Consider UOB CashPlus to pay for your trip. But make sure you have incoming funds (such as your annual bonus, or a fixed deposit maturing) to cover the loan, and don’t overspend on your trip!
- Short-term investments: Take advantage of UOB CashPlus’ 3-month interest free promotion to earn quick profits (for example, through a short 3-month fixed deposit). Just be sure to pay back the loan within the interest-free period.
- Cashflow for SMEs: If you need some extra cashflow to tide over a slow period in your business, consider using UOB CashPlus for a quick, fuss-free, low-interest loan. Use profits earned over the bumper New Year sale period to repay the loan.
A flexible tool for the financially savvy
A LOC, like the current UOB CashPlus promotion, can be used for many different purposes, if you know how to use it properly. Its flexible repayment options and zero interest fees for the first three months and zero processing fees make it an ideal choice for increasing your cash flow when necessary.
For those who are comfortable and adept at handling their own finances, this may well be a powerful and useful financial product.
Read these next:
5 Ways to Get the Highest Credit Score in Singapore
Best Personal Loans in Singapore with the Lowest Interest Rates (for 2019)
4 Times In Life You Should Consider Getting a Personal Loan
Unpaid Credit Card Bills? Here’s How A Balance Transfer Can Help
By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimize happiness and enjoyment in his life.