Being financially responsible doesn’t stop at never carrying a balance on your credit card. Because the truth is, we may find ourselves at a crossroad one day — an unexpected financial situation that may well be beyond our means.
True financial responsibility is the ability to not only to avoid financial pitfalls but also to understand how to act when one inevitably comes up. Crucial to your ability to manage unexpected financial changes is having the knowledge of what financial tools are available, and how to use them appropriately. But if you do not understand credit cards, personal loans, balance transfers and the like, you could make the wrong choice in a financial emergency, creating more problems down the road.
Take, for example, personal loans. Perhaps it’s because of Asian customs that colours borrowing money a subtle shade of wrong, or perhaps because nobody thinks they’ll ever land in a situation that warrants a loan, personal loans in Singapore are considered a tricky territory to tread.
This, despite personal loans being one of the most straightforward and easy to understand products, with competitive interest rates that translate to low cost of borrowing.
In this article, we take an in-depth look into why and when you should use a loan.
Why use a personal loan?
Personal loans, along with credit cards and balance transfers, are three of the most common financial tools available to retail banking customers (read, people like you and me). Of the three, personal loans offer the most stable financial solution and are the easiest and most straightforward to manage.
This is because personal loans:
- Offer a fixed repayment period, providing clarity and certainty
- Have fixed interest rates throughout, allowing you to stabilise your budget
- Have low interest rates, which translates to low cost of borrowing
- Are available in a wide range of configurations, which means you are likely to find a loan that suits your needs
These factors are crucial when a financial emergency occurs and you’re considering the best form of funds to cope. Why?
Well, let’s consider this. When climbing Mount Everest, slow and steady progress is the surest way to reach the summit. Similarly, when you’re staring down debt that looks like Everest, steadily chipping away at it, one monthly payment at a time, is the surest way to get clear.
Fixed repayment period
Personal loans offer fixed repayment periods, which means to say they come with definite start and end dates. As long as you make your payments, you will be free of your debt by the end of the loan. This gives you a sense of certainty because you have a definite forecast for future financial goals.
Fixed interest rate
Also, personal loans feature fixed interest rates throughout the loan period, which means barring late fees or other penalties, you won’t need to spend more than the stipulated repayment amount each month. This allows you to stabilise your budget, which is crucial in getting back to financial normalcy.
Low interest rate
All things considered, personal loans in Singapore have relatively low interest rates, which is why you should consider them as one of your first choices for funding. There’s no point borrowing at a high interest rate with high repayments that you can ill afford, creating another debt trap and causing you to go from the frying pan into the fire.
Wide range on configurations
But perhaps the most favourable feature of personal loans is their wide range of configurations, giving you flexibility in the amount to borrow as well as the time range to pay it back. Longer loan periods means lower monthly payments, so you should choose a loan package that suits your ability to pay back. No point choosing a 3-year loan with monthly repayments that you struggle to meet when you will have a much easier time with a 5- or 7-year loan.
Hopefully we have cleared up the misconception that personal loans are somehow ‘evil’, showing you instead the clear advantages as a financial tool.
Here’s a look at some of the personal loans available.
|Annual Interest Rate* from||Effective Interest Rate (EIR)||Min. Loan Amount||Max. Loan Amount|
|Standard Chartered CashOne Personal Loan||3.88%||8.04%||S$1,000||Up to 4x monthly salary or S$250,000|
|Citi Quick Cash Loan||3.99%||7.5%||S$20,000||Up to 4x monthly salary|
|HSBC Personal Loan||3.7%||7.0%||S$5,000||Up to 8x monthly salary or S$200,000|
|OCBC Personal Loan||3.5%||7.27%||S$1,000||Up to 6x of monthly salary|
In the next section, we will talk about some common scenarios to which personal loans are suited.
When to Use a Personal Loan?
Despite popular belief, personal loans are not just for emergencies meant as a last resort. In fact, with appropriate use, they can help you navigate many a gnarly financial situations.
Here are the top six reasons to apply for a personal loan:
1. For Planning a wedding
Instead of maxing out your credit cards keeping up with a runaway wedding budget, or feeling resentful and deprived over a lack of funds, why not discuss how to meet the expenses with a personal loan instead? Plan your budget together carefully, and choose a loan amount and payment period that is comfortable for you. That way, you can have your dream wedding, and a plan to deal with the financial fallout after.
2. For paying off bills or credit card debt
You’ve been paying and paying but your bills just never seem to end. Maybe high interest rates are the culprit. Using an appropriate personal loan will let you break the cycle of unending bills. First, work out how much you owe, and how much you are paying each month in bills. Then, look for a loan to pay off all your debt, and choose a tenure and repayment amount that you can comfortably cope with. What’s left is simply to pay off your personal loan by sticking to the monthly payment schedule.
3. For home renovations or relocation
Buying a new home, or moving into one, inevitably means requiring a sum of money for various expenses, from moving to renovations to appliance and furniture repairs and replacements. Sure, you could use your savings, or max out your credit card by putting all your furnishings on installment payment plans. But what if you run into an emergency while you have no savings and maxed out credit?
A far better solution would be to look for a renovation loan, which comes with much lower interest rates (but also more requirements, such as an appointed ID firm or contractor, and proof of work.) Some renovation loan packages also provide a secondary loan you can use for furniture. And, then, if you have any outlying amounts to cover, you can apply for a personal loan to make up for the shortfall.
4. For medical emergencies
The cost of medical care in Singapore is expensive, and Medisave only allows you to claim up to a limit for most conditions and procedures. Even with insurance, you can find yourself staring down a hospital bill in the thousands in the event of an emergency.
Taking out a personal loan is a fuss-free way to meet your medical expenses. More importantly, the fixed loan period and monthly amount lets you pay off your debt at a steady rate with no surprises, freeing you to focus on getting well or taking care of your loved ones.
5. For investing and growing your wealth
Borrowing money to invest is not automatically a bad thing to be avoided. Nor does it need to be unnecessarily complicated, attempted only by financial daredevils. All you have to work out is the interest paid, versus interest earned.
For example, let’s say you’re interested in a short-term investment opportunity that gives you 8% in returns over 5 years. However, the minimum investment amount is $20,000 (which would give you $1,600 in returns).
You’re short by $5,000, which you decide to cover using a personal loan over 3 years. Using our personal loan calculator, we find that the interest for the loan amounts to $508. With the profit of $1,600 from your investment, you’re still ahead by $1,092.
This seems like a small amount but seasoned investors know that making small gains is the way to riches, thanks to the power of compounding interest.
6. For unforeseen situations including funerals or divorces
Sometimes life happens, sending even the best laid plans into a tizzy. Funerals and divorces are nerve-wracking emotional roller-coasters, and it can be easy to react with rash decisions, especially financial ones.
To limit this, consider applying for a personal loan to deal with final expenses or legal fees. This will help enforce a budget on proceedings, preventing things from getting out of hand. Afterwards, the steady repayment process can help with closure, without inadvertently causing hardship or bringing up bad blood in case of divorces.
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By Alevin Chan
An ex-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 optimise happiness and enjoyment in his life.