Need cash for that big renovation or unexpected expense? Personal loans in Singapore offer a lump sum of money that you borrow from a bank, typically with a fixed interest rate and repayment term.

 It's crucial to understand different types of personal loans before making a financial decision because each loan comes with its own set of terms, interest rates, fees, and repayment structures that can impact your financial well-being. If you choose the wrong type of personal loan, you can get burdened with higher costs and longer debt periods.

Navigating the world of personal loans in Singapore can feel overwhelming, but this guide is here to help you cut through the noise. We'll explore the key factors to consider so you can confidently choose the best personal loan for your needs – whether you're tackling large expenses, streamlining your finances through debt consolidation, or making important purchases.

>> Learn more: How to Get a Personal Loan in 7 Steps

Unsecured personal loans don’t require collateral like a car or property. Instead, your eligibility is primarily based on your creditworthiness, which is your financial history and ability to repay. This makes unsecured personal loans a flexible solution for funding a variety of general, large expenses, such as medical bills, educational costs, or home renovations. Examples of unsecured loans include credit cards, student loans, personal loans, or lines of credit.

The majority of personal loans issued by banks in Singapore fall under the unsecured category.

>> Learn more: Best Unsecured Personal Loans in Singapore

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Secured personal loans are a type of financing where the borrower pledges a valuable asset – this is usually their home or car – as collateral to secure the loan. This means that if the borrower defaults on the loan, the lender has the legal right to seize and sell the pledged asset to recover the debt. Examples of secured loans include home loans, car loans, and personal loans backed by savings accounts, fixed deposits, or other valuable property.

These are the key features of secured loans:

• Higher loan amounts: Due to the security provided by the collateral, secured personal loans can often offer loan amounts up to S$100,000 or even higher, depending on the assessed value of the asset being pledged.

• Lower interest rates: A significant advantage of secured loans is that they typically come with lower interest rates compared to unsecured loans. This is because the lender's risk is reduced by having collateral to fall back on in case of default. 

• Flexible loan terms: Repayment periods for secured personal loans in Singapore generally range from 1 to 5 years, offering borrowers some flexibility in managing their monthly payments.

Managing multiple debts, especially credit card balances, can be complex. Debt consolidation loans, also known as debt consolidation plans (DCPs), offer a more streamlined approach. Regulated by the Monetary Authority of Singapore, DCPs allow you to consolidate all your unsecured credit facilities from various financial institutions into a single loan for easier repayment. There are currently 17 financial institutions that provide DCPs.

To be eligible for a DCP, you must:

• Be a Singapore Citizen or Permanent Resident;

• Earn between S$20,000 and below S$120,000 per annum with net personal assets of less than $2 million

• Have total interest-bearing unsecured debt on all credit cards and unsecured credit facilities with financial institutions in Singapore that exceeds 12 times of your monthly income

This is not to be confused with the Debt Repayment Scheme (DRS) which is often used as the last line of defence before bankruptcy.

>> Learn more: Best Debt Consolidation Plans in Singapore

Source:

• Debt consolidation (https://www.singsaver.com.sg/personal-loan/comparison/best-debt-consolidation-plans)
• Credit lines (https://www.singsaver.com.sg/personal-loan/credit-line)
• Balance transfers (https://www.singsaver.com.sg/personal-loan/balance-transfer)
• Education loans (https://www.singsaver.com.sg/personal-loan/education-loan)
• Renovation loans (https://www.singsaver.com.sg/personal-loan/comparison/best-renovation-loan)
• Car loans (https://www.singsaver.com.sg/personal-loan/car-loan)
• Home loans (https://www.singsaver.com.sg/page/best-home-loan-rates)

If you have limited credit history or a lower income, securing loan approval can be challenging. This is where co-signed and joint loans come in. They offer alternative pathways to accessing credit by involving another person in the loan agreement. A co-signed loan involves a secondary person (the co-signer) who agrees to be responsible for the debt if the borrower defaults. A joint loan is when both individuals are equally responsible for the debt.

The key features for these two types of loans are:

• Increase your borrowing power: Both loan types help individuals with limited credit history or lower credit scores to qualify for loans they might otherwise not get. The strength of the co-signer's or co-borrower's creditworthiness provides the lender with added security.

• Can be used for any purpose: You can use these loans for not just small purchases, but also for bigger financial commitments like home loans.

Such loans are ideal for borrowers with limited credit history or a poor credit score. They are also good for spouses, family members, or partners who are willing to share responsibility for the loan.

In Singapore, it’s common for parents in Singapore to co-sign car loans for their adult children who are just starting their careers and have a limited credit history. If someone needs a personal loan for expenses like medical bills or home renovations, family members with a better credit history can help them by co-signing the loan. 

Couples in Singapore can take out joint car loans when buying a car they will share. Young couples often use joint home loans when purchasing their first property. All joint borrowers share ownership of the property and are equally liable for the mortgage repayments.

>> Learn more: Best Co-signed or Joint Loans in Singapore

A personal line of credit is like a credit card, but instead of using it to buy things directly in a shop, it's linked to a pool of money you can borrow from whenever you need it. It’s like having access to an instant loan that's always ready.

These are the key features of a personal line of credit:

• Borrow what you need, when you need it: It's like having a flexible loan. You don't have to take out a big chunk of money all at once. You can just withdraw the amount you require, whenever you need it, up to a certain limit the bank gives you.

• Cheaper interest than credit cards: The interest you pay on a personal line of credit is usually lower compared to the interest rates on your credit cards, which can save you money over time.

• Pay only for what you use: You only get charged interest on the specific amount of money you've borrowed and haven't paid back yet. If you don't use it, you don't pay interest on it.

• Flexible repayments: Unlike some loans with fixed monthly payments, you often have more flexibility in how much you repay each month, as long as you meet the minimum payment. This can help manage your cash flow.

Here's when a personal line of credit in Singapore might be the right choice for you:

• Need Funds Now and Then: It's a good option if you anticipate needing access to money from time to time for various reasons, but you don't want the commitment of a large, fixed loan amount.

• Great for Ongoing Costs or Unexpected Bills: It's perfect for situations where you have regular expenses that might fluctuate or for handling unexpected emergencies that require quick access to cash.

>> Learn more: Best Credit Line in Singapore

Want that luxury handbag but your wallet's saying "later"? Buy Now, Pay Later (BNPL) loans let you split your purchase into smaller installments with no interest if paid off within the promotional period.

These are the key features of Buy Now, Pay Later (BNPL) loans:

• Short repayment terms: These loans are usually for a short term, typically ranging from just 3 to 12 months, meaning you'll pay off your purchase relatively quickly.

• For those little luxuries: BNPL is mainly used for smaller, non-essential items you might want right away, like the latest electronics, that new piece of furniture, or trendy fashion apparel.

• Easy access at many places: You can find BNPL options offered directly by various shops when you're checking out, or through separate third-party companies such as Atome or Grab that partner with different merchants.

 Here's when Buy Now, Pay Later (BNPL) loans in Singapore can be a good option:

• Get it now, budget later: They're best for when you need to make a purchase right away but prefer to spread the cost out over a few installments to better manage your budget.

• Smart for zero-interest deals: They can be useful for taking advantage of limited-time offers at retailers that come with zero-interest repayment periods, making your purchase more affordable in the short term.

>> Learn more: BNPL vs Credit Cards

While loans can be helpful financial tools, it's crucial to recognize that not all loans are created equal. Some, particularly those with exorbitant fees or unfavorable repayment terms, can quickly trap borrowers in a dangerous spiral of debt. In Singapore, while many of these predatory lending practices are either illegal or heavily regulated by authorities, it remains vital to be aware of the potential pitfalls and understand the terms of any loan before committing.

1. Credit card advance

One loan to beware is the credit card advance, which is basically borrowing money directly from a credit card by withdrawing cash from an ATM.

Cash advances incur two charges: a cash advance fee, and high interest rates.

We did a survey of credit card advance fees from the three major local banks, and this is what we’ve found: The cash advance fee for DBS, OCBC and UOB are $15 or 8% of the amount withdrawn, whichever is greater. DBS and UOB charge an interest rate of 28.5%, while OCBC charges 28.92% per year.

An interest rate of 28% is much greater than the interest of an unsecured personal loan, which can range from 3.5% to 10%.

Given the exceptionally high interest rates of credit card cash advances, we recommend going for this option only during emergencies.

2. Pawnshop loans

Pawnshop loans are short-term loans that require valuable items to be pawned as collateral. 

This is an example of how it works: 

1. You bring a valuable personal item (collateral) to a licensed pawnshop. Common items include jewelry (gold, diamonds), watches, electronics, antiques, and branded goods. 

2. The pawnbroker assesses the item's value and tells you the loan amount, which will typically be a fraction of the item's estimated value. 

3. If you accept the loan, you get the cash and the pawnshop keeps your item as collateral. 

4. To get your pawned item back, you must repay the full loan amount plus the accrued interest by the maturity date stated on the pawn ticket.

There are options to extend the loan for another period, but if you fail to repay the loan and interest by the maturity date, the pawnshop becomes the owner of your item.

These are things to keep in mind if you pawn your item:

• Short-term solution: Pawnshop loans are designed for short-term cash needs.

• High cost: The interest rates and fees can be very high compared to other loan options.   

• Risk of loss: You risk permanently losing your valuable item if you cannot repay the loan.

3. Payday loans

Payday loans are short-term, unsecured loans, usually a small amount of cash, to help tide people over until their next paycheck arrives. These loans are typically due for repayment within a very short period.

While payday loans offer quick access to funds, it's essential to be aware of their potential drawbacks. MAS caps the interest rate of payday loans to 4% per month by licensed moneylenders. But the debt can still accumulate quickly over short periods, and can trap borrowers in a cycle of debt.

As such, these loans are more tightly controlled compared to those in some other countries. It’s crucial to fully understand the terms and explore all other available options before resorting to a payday loan.

>> Learn more: Payday Loans in Singapore