How to Find the Best Loan

Taking out a loan is one of the most powerful and dangerous financial decisions a person makes in their lifetime. By providing funding when you most need it, a loan allows you to do things that you wouldn't otherwise be able to do, like buying a home that costs more than your savings or paying for a medical emergency. But, it can also lead to financial ruin if not done properly. For people who have not taken out a loan before, all the different types of loans, interest rates and fees, getting the best loan for their needs can be quite confusing. Below, we walk you through each of the major decision steps when choosing a loan. Read on to learn how you can optimise your finances.

Table of Contents

Use Specialized Loans Whenever Possible

In Singapore, there are five main types of loans for consumers: home loans, car loans, personal loans, education loans and renovation loans. As a general rule of thumb, you should always get the most specific loan possible. Banks charge higher interest rate for riskier loans, and it is usually considered to be safer when banks know what you are going to use the money for. Hence, if you know you need funding specifically for purchasing a home or car, or for financing your home renovation or college education, you should always get the loan specifically designated for each of these purposes.

Personal loans are the only exception to this rule. Because this loan is available for anyone with sufficient income, you can use it to do anything you want with it, i.e. funding your wedding, honeymoon, medical emergency, business emergency, etc. However, banks also compensate for this flexibility by charging you the highest interest rate among all the loan products available. Therefore, it should generally be considered as a last resort of funding, though it is generally better than other less conventional options like credit card debt, payday loan or cash advances.

Finally, you should always shop around and compare the best offerings from each bank. Our team at ValueChampion has painstakingly combed through all the loan products available in Singapore to present you with options that represent the best value in the country. You can visit any of the following links to start comparing now:

Compare Interest Rates Correctly for Different Types of Loans

Often advertising "low" interest rates, Banks would couple this with confusing terms like annual interest rate, effective interest rate, flat rate and rest rate. This results in the need to constantly go back and forth among these words, making the comparison process between different loan offerings from different banks quite painful at times. What is most important is to know that you should focus on comparing effective interest rates between banks no matter what loan it is. Below, we discuss how to estimate the effective interest rate for each type of loan.

In general, "safer" types of loans like home loans, home renovation loans and education loans come with a type of interest rate called "rest rate." This is the conventional interest rate that is charged monthly on the amount of money you have not repaid to the lender. In one month, you may pay 2.5% on a S$50,000 loan. After you pay down the loan by S$10,000 next month, you will only have to pay the interest of 2.5% on the remaining balance of S$40,000. To estimate effective interest rates for rest rate loans, you just have to combine the effect of bank's processing fee to the interest rate. If this is too difficult, you can easily just compare the processing fees and rest interest rates separately.

On the other hand, risker loans like car loans and personal loans typically come with a rate called "flat rate." These loans charge a fixed % of interest on your loan every single month no matter how much of the loan you've repaid. In one month, you may pay 2.5% on a S$50,000 loan. But even after you pay down the loan by S$10,000 next month, you will still have to pay the interest of 2.5% on the original S$50,000. In order to calculate EIR of these loans, you have to convert the flat rate into its equivalent level of a more "intuitive" rest rate, and then account for the impact of processing fees.

If you want to learn how to accurately calculate and compare rest and flat rate, you can read our guide on annual interest rate and effective interest rate. The key takeaway here, however, is that you should be comparing EIR of every loan so that you are comparing the total cost of each loan on an apples-to-apples basis.

Loan TypeInterest Rate Type
Home LoansRest Rate
Home Renovation LoansRest Rate
Education LoansRest Rate
Car LoansFlat Rate
Personal LoansFlat Rate

Balance Between Maximising Your Loan and Minimizing Interest Payment

Last but not least, one of the most important things you can do when choosing a loan is maximising the amount of loan you borrow (so you can get sufficient funding for whatever you need to do) while keeping your monthly installment at a very manageable level. It's a fine balance between getting the most amount of funding while minimising what you have to pay out to the lender every month.

It's not always about Total Debt Servicing Ratio (TDSR) or Loan-to-Value Ratio (LTV)

The main way you can do this is by first calculating the amount of monthly income you can set aside to service all of your loans. Generally, the Monetary Authority of Singapore requires the total debt servicing payment to be 60% of your monthly income at most (also referred to as Total Debt Servicing Ratio - TDSR), though this rule doesn't necessarily apply for people who are refinancing their home loans. However, we recommend not maximising on this 60% since you should leave some margin for error so that your budget can handle the total sum of your loan repayments in the scenario the interest rates rise.

Then, you want to look for loan offerings that comes with the monthly repayment (principal + interest) at or below the amount you calculated for yourself above. Generally, most loans come with a maximum principal amount ratio that they are willing to allow, often in a form of loan-to-value (LTV) or multiple of your salary. For example, car loans come with a 70% LTV ratio limit, meaning you can only borrow up to S$70,000 for a car that is worth S$100,000. However, what you should be looking for is not the maximum loan amount you can get under the permitted LTV ratio, but rather is whether your income level can comfortably handle such loan's repayment schedule.

While you should have a good idea about how much you need to borrow, it might be time for you to reconsider your loan if you find that monthly repayments for the loan is more than what you can manage. You should never borrow more than you need, and you should never borrow more than you can afford.

Loan TypeMaximum Loan Limit
Home Loan80% LTV or less depending on type and number of property you own
Car Loan70% LTV if less or equal to S$20,000
60% if more than S$20,000
Renovation Loans6x monthly salary
Personal Loans4-8x monthly salary or more, depending on your credit score
Education Loans8-10x monthly salary of guarantor

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Duckju Kang

Duckju (DJ) is the founder and CEO of ValueChampion. He covers the financial services industry, consumer finance products, budgeting and investing. He previously worked at hedge funds such as Tiger Asia and Cadian Capital. He graduated from Yale University with a Bachelor of Arts degree in Economics with honors, Magna Cum Laude. His work has been featured on major international media such as CNBC, Bloomberg, CNN, the Straits Times, Today and more.

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