How to Choose the Right Personal Loan Term Length for You

When you take out a personal loan, you'll pay it back through fixed monthly instalments over a specific duration, known as the loan term or loan tenure.

Selecting the right loan term is crucial, as it directly affects both your monthly repayments and the total interest you'll end up paying.

Understanding how personal loan terms work will allow you to choose one that fits your financial situation.

Personal loan terms typically range from six months to eight years, depending on the lender. Some lenders have one-year loans, while others have specific types of personal loans, like home renovation loans.

» Check out: Best personal loans in Singapore

The length of your personal loan repayment period significantly impacts both your monthly instalments and the total interest you'll pay over time.

Shorter loan terms usually come with higher monthly payments but lower overall interest costs. In contrast, longer loan tenures offer more affordable monthly instalments but result in higher total interest paid throughout the loan.

For instance, if you take out a S$10,000 loan at an Effective Interest Rate (EIR) of 3.49% p.a. for a 12-month term, your monthly instalment would be approximately S$849. Opting for a three-year term instead would reduce your monthly payment to around S$294, though you would pay more in interest over the life of the loan.

Selecting the best loan term length is all about having the right balance between affordability in repayments and total interest paid. 

A shorter loan term could be the ideal choice if:

• You have urgent needs.

• You have a regular income source.

• You want to save on interest.

A longer loan term might suit you better if:

• You want to reduce your monthly financial burden.

• Have other financial obligations, such as mortgage or CPF deductions.

» Check out: Best personal loans

Choosing the right loan tenure can impact both your short-term cash flow and long-term financial commitments. Therefore, it’s important to take a closer look at the following factors to determine the right loan for you.

• Loan amount: Smaller loans are usually easier to repay over a shorter period. But if you're borrowing a large sum, a longer repayment term might make more sense. 

• EIR: Always check the EIR, as it reflects the true cost of your loan. Unlike the nominal interest rate, the EIR accounts for how interest is calculated and the frequency of your repayments, giving you a clearer picture of your total borrowing costs. A longer loan tenure, for instance, may lower your monthly payments but typically results in higher overall interest paid over the life of the loan.

» Check out: Best personal loan rates

• Monthly affordability: Ensure your budget can comfortably accommodate the monthly instalments throughout the loan duration. Missing payments will mean paying late fees. And when you leave it unpaid for an extended period, it could negatively impact your credit score.

• Total interest payable: If the lender doesn't clearly state the total interest, use an online personal loan calculator to estimate the full cost of borrowing. Make sure you're comfortable with the total amount you'll pay over time.

• Your future financial outlook: Since personal loans typically come with fixed repayments, it’s important to think ahead. If you expect your financial situation to change, such as reduced income or increased expenses, you may want to opt for a longer term with more manageable monthly payments.

This is how you can get a personal loan in Singapore:

1. Check your credit: Before applying, it’s important to understand your credit standing. Banks and licensed moneylenders in Singapore use your credit score, income, and existing debt to evaluate your eligibility. You can get a copy of your credit report from Credit Bureau Singapore to see how your financial habits are reflected and identify any issues that might affect your approval.

2. Assess your budget: Identify how much you can comfortably repay each month without straining your finances. Take note of your income, monthly expenses, and any other ongoing financial commitments. You can also use an online personal loan calculator to estimate your monthly repayments or check the one provided by SingSaver.

3. Compare loan offers: Take time to compare interest rates, processing fees, repayment terms, and promotional perks from different banks or financial institutions in Singapore. Pay close attention to the EIR, as it gives a clearer picture of the actual cost of borrowing.

4. Gather the necessary documents: For a more seamless application process, prepare the necessary documents ahead of time. These could include your NRIC, latest income tax notice of assessment (NOA), and latest computerised payslip. Requirements may differ depending on the lender and your employment status.

5. Submit your application: Once you’ve decided on a loan offer, you’ll need to complete a formal application. This typically involves submitting documents to verify your identity and income. The lender will also perform a hard credit check, which may temporarily lower your credit score. If your application is approved, most lenders will disburse the funds.

» Learn more: Dos and Don’ts when getting a personal loan