Planning to Take a Personal Loan? Here's What You Need to Keep in Mind Before Applying

By Digvijay Singh Kanwar

Planning to Take a Personal Loan? Here’s What You Need to Keep in Mind Before Applying

Are you cash-strapped? Don’t know how to tackle an emergency situation without enough cash? In such situations, a personal loan can be your saviour. In Singapore, there are several ways to get a loan like this, starting from banks, NBFCs, legal moneylenders, or even using a credit card as a temporary line of credit.

But, like many others, you may be confused about how to go about this or where to start. Taking a personal loan comes with certain challenges. Hence, before you pounce on your keyboard and start filling out application forms, here are some of the aspects you should keep in mind.

Pick Out a Lender Carefully

NBFCs and banks are bombarding customers with personal loan offers and at what they claim are low rates than others. Do not fall for such offers. Avoid going for the first offer you receive in your mail inbox or via a text message. While it is easy to say yes to a bank you already have a relationship with, you may be missing out on other good deals if you do not research thoroughly. Take your time and look around for personal loans with lowest interest rates.

Calculate the Rate of Interest

You cannot beat banks when it comes to financial jugglery. The flat interest rate is often used to lure business. This flat interest rate of interest or the AIR (Applied Interest Rate) is misleading as it does not take documentation charges and other administrative charges into account. If you know the EIR or the Effective Interest Rate of the loan, then you will know the actual cost of borrowing from the bank. The AIR will be anywhere between 3% p.a. and 8% p.a., while the corresponding EIR will be somewhere in between 7% p.a. and 15% p.a.

Let’s take DBS Personal Loan as an example. If you borrow S$5,000 for 2 years at 3.88% p.a. and pay 1% of the loan amount as a processing fee, then your monthly instalment will come up to S$224.33. This calculation is done in the following manner:

First, deduct 1% of the processing fee from the loan amount. That means, S$50 gets deducted from the amount and you get S$4,950 in your account.

Second, calculate the monthly principal amount i.e. S$208.33 (S$5,000/24) and the amount of interest i.e. S$192.06 (3.88/100 x S$4,950).

Third, divide the interest amount with 12 to get the monthly interest rate, which is S$16 (S$192.06/12).

Last of all, add the principal amount (S$208.33) and the monthly interest rate (S$16) to know your monthly instalment amount, which is S$224.33

Check the Fees and Charges

Have you ever come across banks who advertise personal loans that says ‘0% interest rates’? Well, it’s never really 0%. Selling financial products to customers is their business. So, it does not make sense for them to lend at no cost at all. Instead, they will make you pay in a different way, through something called a processing fee. This processing fee is usually from 1% to 3% and gets deducted from the approved loan amount. Other fees that you should look out for are a change in the loan repayment duration, late payment charges, cancellation fees, and early redemption fee.

Are You Planning to Pledge a Collateral?

In Singapore, there are 2 kinds of personal loans - secured and unsecured loans. In most cases, they are always unsecured loans. Personal loans are very rarely secured and given only when you don’t meet the eligibility criteria for the unsecured ones.

To acquire a secured loan, you must pledge a collateral, which can be a property title or a car title. Unsecured personal loans are those that do not require any security. These loans are based on your credit score and ability to repay. As a result, these loans characteristically charge a higher interest rate than secured ones and have stricter terms and conditions.

Look Out for Promotions

Several banks in Singapore offer special discounts on interest rates, receive cashback, and enjoy processing fee waivers for a limited time only. Before you apply, look for such offers and discounts and know your liability during this period and after it. The monthly instalment payment can vary considerably during these 2 stages. For instance, if youper choose Maybank CreditAble Term Loan and borrow at least S$9,000, you will receive a cash credit of S$120.

Know Your Credit Score

You can get a personal loan instantly these days, with several banks promising a 24-hour approval. But, this is only possible if you have a clean credit rating and the bank has no reasons at all to reject your application. If you’re not too big on the instant approval feature, make sure you have no history of bad records, which includes late payments or missing deadlines. A bad credit score can seriously hamper your efforts in getting the loan you want.

Find out About the Prepayment Rules

If you wish to close your personal loan account early, you will attract an early redemption fee. This fee is usually between S$100 and S$250. Early prepayment of a personal loan means that the banks will stop earning interest that they had expected from the agreement. If the tenure is more than 3 years and you know that your salary will increase eventually, it is better to take a loan with the lowest foreclosure charges.

The flexibility of the Terms

Taking a personal and servicing it are 2 different things. Your intention is to repay the loan on time and stick to the agreement. But, circumstances may change along the way. For example, an emergency situation may arise, you may lose your job, or there can be a fall in the economy. In such a case, a personal loan should allow you to renegotiate the terms and conditions. This may include extending the loan period, decreasing the interest rate, or increasing the loan amount.

While shopping for personal loans with the lowest interest rate is advisable, every time you approach a lender, your credit score is assessed. If you contact too many banks and lender, you might come across as a credit hungry person. This way, your score will take a beating. Hence, check and compare personal loansto choose the one that suits your needs in the best possible way.

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