Pros and Cons of Personal Loans

Facing an unexpected bill or major expense? Or are you having trouble juggling multiple debts? A personal loan could provide a solution by offering funds upfront and allowing repayment over time. Before committing, consider both the benefits and drawbacks to see if it aligns with your financial circumstances.

Let’s take a closer look at some of the ways a personal loan can benefit you:

Provides relief against stress and anxiety

When the bills start to pile up, month after month, you may find your stress levels rising with it. As long as you keep on top of repayments, getting a personal loan can help you manage your finances and act as short-term relief against mounting anxiety, especially if you find yourself in a difficult situation.

Allows you to maintain your current lifestyle

Have the means to settle all your existing debt obligations, but do not wish to compromise on your current lifestyle? Having to give up your hobbies and some of the things that matter most to you can have a negative impact on your psychological wellbeing. A personal loan can allow you to fulfill your financial obligations while avoiding changes to your current lifestyle.

Debt consolidation 

It’s common knowledge that being late with your payments can incur additional charges and penalties. If you have so many debt obligations to keep track of that you find yourself frequently forgetting payment deadlines, a personal loan can help by offering you a debt consolidation solution. Having only one deadline to remember can go a long way in cutting out those late fees!

» MORE: Personal loan vs. debt consolidation in Singapore

Easier budgeting 

Struggle with budgeting? The good news is that personal loans offer a predictable repayment schedule. Because the annual percentage rate (APR) is fixed and monthly repayments remain the same over the term of the loan, this will make budgeting a lot easier for you.

» MORE: Top strategies for managing a personal loan

Despite all the benefits a personal loan can offer, there are some drawbacks to take into consideration as well. Here are some of them:

Unfavourable terms can cost you more over time

Because of the interest rates charged on personal loans, the truth is that you will end up paying more over time. Most lenders also charge a one-time processing fee, payable when you first take out the loan. As a whole, this will increase your debt obligation until you have fully paid off the loan.

Late payments can bring down credit score

On one hand, managing debt well can help to boost your credit score. On the other, making late payments can have the opposite effect. Do not underestimate the impact of even one late payment, as it can bring down your credit score by quite a few points. 

» MORE: Check your credit score in Singapore

Less freedom with budgeting

Being responsible with your finances means making monthly repayments on time. That’s the only way a personal loan will work to your best advantage. However, this does mean that you are setting aside a portion of your monthly income towards loan repayment. This reduced cashflow can result in less freedom with budgeting.

Reduces maximum mortgage amount

As a potential homeowner in Singapore, you will need to be mindful of your Total Debt Servicing Ratio (TDSR), which is in place to ensure that borrowers do not overreach their ability to pay off a mortgage. TSDR is currently set at 55% and calculated by taking your monthly debt obligation, divided by your gross monthly income. Hence, the higher your debt obligations, the smaller the mortgage you can expect to get. 

When considering whether to take out a personal loan, you will need to weigh up the impact this will have on your TSDR.

» MORE: Property cooling measures that affect Singaporean homebuyers

Opportunity costs

Opportunity cost can often be an ‘invisible’ drawback when it comes to making financial decisions. While such a loan can buy you opportunities for investment and/or upgrading, they can similarly present an opportunity cost in other areas. Remember, money that goes towards paying off debt each month is money that isn’t going towards your savings or investments.

» MORE: Taking a personal loan to offset the higher cost of living

If you have good credit and are looking to consolidate your debts or tackle a home renovation, a personal loan could be a good choice for you. Be aware, though, that it may not be the best choice if you are offered a high interest rate or if you anticipate difficulties making repayments. 

To determine if a personal loan is the right financing tool for your goals:

• Compare your financing choices: The option with the lowest additional rates is usually the most favorable.

• Do research on personal loan providers: Alongside the interest rate, examine aspects such as the loan amount and term to ensure that it fits your circumstances.

• Analyse your budget, factoring in loan payments: Confirm that you can comfortably afford monthly repayments. 

» MORE: Getting a personal loan in 7 steps

1. Get prequalified

A good first step when seeking a personal loan is to seek out pre-qualification. This is a quick process that shows you the potential loan amount, interest rate, repayment duration, and monthly payments you will need to make. As it only involves a soft credit check, you can compare offers from different lenders without harming your credit score. 

2. Select your lender

Once you have identified the most favorable loan offer, you will start the application process with your chosen lender formally. 

3. Submit required documentation 

To kickstart the application process, your lender will request documentation like payslips, IRAS Notice(s) of Assessment for the past years, as well as bank statements to confirm your income and other financial details. 

4. Wait for approval

In most cases, lenders will finalise the loan approval and release the funds within a week. If your application is rejected, you should be notified of the reason(s), which will allow you to take steps to improve your financial profile before trying again. 

» MORE: Find the best personal loan for your needs

If a personal loan isn’t the right fit for you, consider these other financing options:

Buy Now Pay Later (BNPL)

BNPL providers like Grab PayLater, Hoolah and Atome provide financing options at checkout, allowing you to split purchases into smaller payments over time, often without interest or fees. If you are making a significant purchase from a retailer offering BNPL and can manage the monthly payments, it's likely a more cost-effective option than an interest-bearing loan.

0% APR credit cards

These cards offer an introductory period, typically 12 months, where you can borrow money without incurring interest as long as you repay the balance within that timeframe. If the 0% APR also applies to balance transfers, it can be an inexpensive way to consolidate debt.

If you have good credit and can pay off the balance before the promotional period ends, you could secure interest-free financing – something personal loans don't offer!

» MORE: Compare 0% APR credit cards in Singapore