An easy guide to the four types of personal loans that compares interest rates, one-time processing fees, loan tenures, and when you should be applying for each.
1) Personal Instalment Loan
The first is the usual personal instalment loan. Different banks have different names for it but the principle is the same: you borrow a specific sum, pay a one-time processing fee (banks usually waive this) and agree to repay the amount in fixed monthly instalments of up to 60 months.
- How it works: Personal Instalment Loans allow you to borrow a sum of money and repay them in equal monthly instalments. The interest and fees are calculated for the whole loan tenure and added to the total loan amount.
- Fees: One-time processing fees range from $0 and to 3%. Interest rates vary from bank to bank and start from 3% (Effective Interest Rate at 6.96%) and above. Banks sometimes waive the processing fee and offer exclusive interest rates during promotional periods.
- Loan amount: Instalment loans are based on available credit limit in your personal loan account or line of credit account. Typically, the maximum amount is 4x your monthly salary. This can go up to 10x your monthly salary if your annual income is above $120,000 and you have a good credit history.
- Loan tenure: Repayment period typically ranges from 12 to 60 months.
- When you should use it: Personal Instalment Loans are handy when you need a big sum of money to cover a big-ticket expense that will take you a longer time to pay up.
- Example: Your investments have turned sour and you’re staring at total outstanding debt of $40,000. Take out a personal instalment loan over, say 24 months, and gradually repay that sum in equal monthly instalments over the length of the tenure.
Compare the most attractive personal instalment loan offers in Singapore now, only on SingSaver.
2. Line of Credit
The second type of personal loan is the line of credit, which is an overdraft facility that only charges interest when you withdraw from the account.
- How it works: Once approved, the funds can be withdrawn via ATM, cheque, internet banking or by going to a physical bank branch. You are charged interest the moment you draw funds. When you repay the funds, no interest is charged.
- Fees: Line of credit typically have an annual fee ranging from $60 to $120. Interest rates are generally between 18% to 22% p.a, before any promotional offer.
- Loan amount: Banks usually offer 2x your monthly salary as the credit limit, but this can go up to 4x or 6x when you include other credit facilities.
- Loan tenure: There is no fixed tenure. You have the facility for as long as you wish. You pay interest when you use and vice versa.
- When you should use it: A line of credit is useful as a standby cash fund for unexpected expenses. If you need funds for an emergency, you can withdraw cash instantly without any approval process. But the trick is to withdraw these funds only when absolutely necessary.
- Example: You’re a small business owner and need a standby cash facility to buy office equipment, supplies or hire extra manpower to tide over a busy sales period. Once that busy period is over, quickly repay the amount of cash you borrowed from the line of credit.
Compare the most attractive line of credit offers in Singapore now, only on SingSaver.
3. Funds Transfer or Balance Transfer
The third type of personal loan is a Funds Transfer (FT) or Balance Transfer (BT). This loan facility uses the available credit on your credit card. You pay a one-time processing fee and enjoy a very low or 0% rate for between 3 to 12 months. After this, you either settle the total amount outstanding or you end up being charged interest rates between 18% to 29%, depending on the credit facility the funds were drawn down from.
- How it works: A balance transfer helps you transfer outstanding balance from one or more credit cards to a low or 0% interest account or credit line. It provides you with quick cash in times of emergency or need. It’s subject to a one-time processing fee on the approved transfer amount.
- Fees: For balance transfer offers, banks usually charge a one-time processing fee of between 1% to 5% on your approved loan amount. The best balance transfer offers will waive this processing fee.
- Loan amount: Typical balance transfer loans are between minimum of S$500 but can go up to 10X your monthly salary if you're a high income earner and have a good credit history.
- Loan tenure: Typical repayment period ranges between 6 to 12 months before a high interest rate kicks in.
- When should you use it: Balance transfers are best if you need cash urgently, or have a big, short-term expense on the horizon and want to avoid high interest rates on other types of loan facilities. Typical use cases include consolidating repayment on outstanding debt on a number of credit cards or emergency car repair or medical bills, investment or business opportunities. Also, remember to compare the best balance transfer offers on the market, which can either completely waive or offset the processing fee through incentives or cashback.
- Example: You have a total outstanding debt of S$30,000 spread out over multiple credit cards, and you’re juggling paying between 20-25% interest rate on each credit card every month. Use a balance transfer to consolidate all the outstanding credit card debt into one, and gradually repay this consolidated sum every month, while enjoying either a zero or low interest rate per month for the duration of the loan tenure, which gives you some breathing space. Have a plan to clear or reduce the total outstanding debt as much as possible by the end of the tenure.
Compare the most attractive balance transfer offers in Singapore now, only on SingSaver.
4. Debt Consolidation Plan
The fourth type of personal loan is the Debt Consolidation Plan, which is a government-approved scheme available with all leading banks in Singapore. If you have several open unsecured loans – such as lines of credit and credit cards – and you’re finding it hard to manage all the repayments, go for a Debt Consolidation Plan. It brings together all your open unsecured credit under one umbrella, which means easier repayment and debt management. You need to remember only one repayment due date, and the interest rates are lower than a regular personal loan.
- How it works: A DCP only applies to credit cards, credit lines and personal loans. Once approved, the new bank will take over all other loans from the other banks. All amounts will be paid up including fees and charges. Those accounts will either be closed or temporarily suspended. You need to make monthly payments to the new bank that arranged the DCP until the total amount is paid up. You can refinance your DCP with a new bank after 3 months upon prior agreement with the previous bank's DCP.
- Fees: There will be a one-time processing fee. Depending on the bank and promotional rates, the Effective Interest Rate is typically between 6.7% to 12% p.a.
- Loan amount: The loan amount will be the total outstanding on your credit cards, credit lines and personal loans. And you need to have an outstanding debt of at least 12 times your monthly salary before you can apply for the DCP.
- Loan tenure: Tenures range from one to 10 years.
- When you should use it: If you have trouble keeping up with your loan repayments and have a significant amount of debt, a rough guide being 12x your monthly salary. considerable amount of debt to repay. It not only lowers your interest rates, but also forces you into a disciplined repayment scheme. Since your other facilities are closed or suspended unless you repay the whole loan, you are less likely to accumulate more debts.
- Example: You have outstanding debt of $100,000. Apply for a debt consolidation plan which closes off all other credit facilities, allowing you to single-mindedly focus on paying off this debt every month over a sustained period of up to 10 years.
Compare the most attractive debt consolidation offers in Singapore now, only on SingSaver.
What you need to know before borrowing
1. Have a repayment plan in place
The common perception is that personal loans are bad. Truth is, it’s not all negative. Loans have a functional and, occasionally, profitable purpose. For example, imagine you have funds stuck in a stock. Selling it at its current price means losing money. So, take a loan, pay interest and repay it when the stock price goes up. You still make a net profit if the gains from the stock is greater than the interest you paid.
The real trouble with personal loans is a lot of people don’t have a proper repayment plan in place. The usual game plan is to borrow money and assume we will pay it off one way or the other. That is precisely the reason why one loan leads to another. Eventually, it becomes a vicious cycle. Therefore, borrow only when you really have to and be sure to know how and when you’ll finish repaying the loan.
2. A lower percentage doesn’t mean a lower interest
The first thing to remember is that many loans are front-ended. Normal loan rates work very simply. You borrow money and pay a fixed interest on the amount borrowed. When you repay it, there is no interest charged. Front-ended means the interest is applied to the total loan amount and calculated for the duration of the loan. Then that amount is added to your loan and that becomes your total outstanding debt. So, even though you are reducing the loan amount, you are actually paying interest for money that you have already repaid.
Which brings us to the Effective Interest Rate (EIR). This is especially applicable to Term Loans and BTs. For example, the banks offer a low processing fee of 5% on a $10,000 FT ($500). But since the loan is front-ended, the EIR is in fact a lot higher. So study the offer and terms and considerations carefully before you apply for a personal loan with the lowest interest rate.
Here’s an example:
Maybank Term Loan - Interest rate vs EIR
|Repayment Period||Processing Fee||Interest Rate||Effective Interest Rate||Monthly Instalments|
|12 months||2%||6% p.a.||14.45% p.a.||$795|
|24 months||2%||6.3 % p.a.||13.58% p.a.||$423|
|36 months||2%||6.88% p.a.||13.77 p.a.||$302|
|48 months||2%||6.88% p.a.||13.31 p.a.||$239|
|60 months||2%||6.88% p.a.||12.96% p.a.||$202|
These days, banks rarely charge the full published rates. Consumers are savvy and expect banks to offer better rates. Banks now offer preferential or promotional interest rates for a limited period and the interest rate after that are very high. So, be very, very strict about settling the full loan amount within the promotional period.
3. Pay off the loan in full before the promotional interest rate ends
By all means, take advantage of the banks' various promotional offers but remember that it is a loan, and with all loans, always repay the full amount before the promotion period is over to avoid high interest charges.
4. Avoid applying for successive Balance Transfers
If you can’t finish repaying a $10,000 BT in six months, the general wisdom is to settle the outstanding amount within the promotional period and apply for another BT. This way, you eventually clear the amount by applying for a lower loan each subsequent time. Bear in mind, however, that the second or third application may be rejected. This could be due to any number of reasons like exceeding your Total Debt Servicing Ratio limit. Banks won’t reveal the reason. Don't borrow (from another party or bank at a higher interest) expecting your FT to always be approved.
5. Banks use risk-based pricing to adjust interest rates
Banks assess your credit profile before approving your loan and the accompanying interest rate. Conventional thinking is that someone who badly needs a loan or has applied for a loan before has a “risky” credit profile. Conversely, customers who don’t need a loan or have not applied for a loan before have a “good” credit profile. So every customer is offered a different interest rate by the bank.
6. All borrowing affects your TDSR
As always, every loan or charge under your name impacts your TDSR, whether it’s for six or 60 months. Plan your loans carefully, so that an FT or Term Loan of $5,000 doesn’t get in the way of a $500,000 home loan or substantial car loan.
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By Isaac Anil
Isaac thinks life is what happens in between football matches. He is a born again dog lover who thinks cats are overrated. Having tried his hand at multiple vocations, he holds the same opinion about hard work. Till he can figure a way to beat the system, he relies on whiskey to get by.