5 Things To Watch Out When Taking Up A Personal Loan

If you find yourself short on cash and need a sum of money to tide you over a short period of time, a personal loan can come in useful.

In Singapore, there are a number of ways to get a personal loan, ranging from banks, legal moneylenders or even using your credit card as a temporary credit line.

While most borrowers may only focus on the cost of a loan, there are a number of other equally important points to consider before taking up a personal loan. Go through the list below carefully before applying for one!

Related: A Basic Guide to Personal Loans: What They Are & How to Apply

Fees & Charges

Ever seen an advertisement for a personal loan that says “0% interest rates”? Well, let’s just say that banks are businesses too so there’s hardly any sense to lend you money for no charges. Instead, you’ll pay these fees in a different way, usually through what is called an origination or processing fee. Do note that this origination fee is usually deducted from the loan approved and usually cost between 1 to 5% of the loan amount.

Other fees to watch out for include charges for a change of tenor, late payment fees, cancellation fees as well as an early redemption fee if you decide to pay off your loan earlier than expected.

Interest rates

When you look up online for a personal loan, you may be confused by a number of different interest rates the banks use to price their loans. Mostly, you will see two different interest rates, the nominal and the effective interest rate, and you’ll notice that the former is usually lower than the latter.

Always remember to use the effective interest rate (EIR) to compare different offers from banks as it takes into consideration the compounding periods and application fees, and provides a better gauge if you are comparing the loan rates across different providers.

However, don’t make the mistake of ignoring the annual flat rate. This is what you need to use to figure out what you have to pay each month back to the bank, so you better make sure your monthly budgets can handle it.

Related: Calculating Effective Interest Rate vs Applied Interest Rate

Your Credit Rating

You can pretty much get a personal loan rather quickly these days, with some banks promising an approval within 24 hours. However, this is based on the assumption that you have a clean credit record and gives the bank no reason to reject you.

So if you want to get any approval, ensure that you have no or minimal history of bad credit records, including frequent late payment of your bills or debts, and not having sent a number of credit applications during the same time period.

Related: Moneylenders Credit Bureau’s Guide To Your Loan Information Report

Borrow according to your purpose

Ever wonder why there are so many types of loans when you can simply take a personal loan? Would you take up a study loan or use a personal loan to pay for your university tuition fees? Are you trying to figure out a way to remodel your home? Or would you like a balance transfer loan to pay off your credit card debt?

As loans such as student loans and renovations loans are taken out for a very specific purpose, they tend to have lower interest rates. You are essentially charged a premium to take out a personal loan as you have greater flexibility on what you can spend the money on. Hence, you have a specific use for the loan, it could be in your interest to check what loan types are available to you instead of just taking out a persona loan.

That being said, some of these lower interest loans may not grant you a lump sum of money upfront, so you would also have to consider how quickly you would need to use the money.

Related: Should You Take Out An Education Loan or Personal Loan For Your Higher Studies?

Minimum Tenure

Most banks in Singapore require you to take on a minimum tenure of 12 months for a personal loan, even if you can pay off your $10,000 loan in 6 months. This is to ensure that the bank earns enough interest off the borrower. Paying it off early will then cause you to incur a pre-payment charge. This is why those looking to take up a personal loan need to weigh their different options when they need cash.

For instance, if you only need a small amount of money, such as $2,000, to pay off a one-time hospital bill, it may not be the most economical choice to take up a personal loan and pay it over a tenure of 1 year. In fact, it may make more sense to use a credit card instead.

As you only get your credit card bill once a month and often have 30 days from the day you receive said bill to pay it, if you are certain that you only need a short amount of time, say 30-60 days, to scrounge up the money to pay off the loan, paying off your credit card in full would not incur any interest charges at all and hence would be the more economical choice.

While a personal loan can be a very useful financial tool to tide you over a period of cash-crunch, do your research to ensure you’ve got the best deal by comparing using the above pointers!

If you are interested in learning more about personal loans, check out our resources below!

Read More:

• 4 Tips for Using Credit Cards to Make Large Purchases You Can’t Afford
• 3 Ways to Counter a High Interest Rate on Your Personal Loan
• Step-By-Step Guide to Clearing and Managing Debt
• 4 Common Reasons For Taking a Personal Loan in Singapore
• 3 Serious Consequences of Not Repaying Loans on Time

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