How Do Personal Loans Work In Singapore?

If you find yourself in need of extra funds, one of the most convenient solutions is to get a personal loan. Not only are personal loans flexible, their fixed repayment structure and lower interest rate also make them easier to manage than credit cards. How do personal loans work in Singapore, and what’s the process of getting one? Let’s take a closer look.

A personal loan is a sum of money borrowed from a licensed lender, under terms agreed upon by both parties. The loan is extended by the lender on an unsecured basis – i.e., without collateral. In return for taking the loan, the borrower agrees to repay the entire loan with interest to the lender by a stipulated date. 

Commonly, personal loans in Singapore are structured according to a monthly repayment schedule. This means that the borrower has to pay a fixed amount by the same due date each month, until the debt is paid off. 

How much to pay each month depends on the amount borrowed, the interest rate, and the duration of the repayment period aka the loan tenure. We’ll discuss these factors in more detail in a later section. 

Personal loans in Singapore may be obtained from banks and licensed moneylenders. To ensure your rights are protected, never get personal loans from unlicensed lenders or unknown parties. Doing so will cause you to be subject to unfairly high interest, harassment, threats and even violence.

See also: How Long Does it Take to Get a Personal Loan

A personal loan can be put to any use, at your own discretion. Once the loan is disbursed to you, there are no restrictions on how you can use the funds.

Some common uses for personal loans include to pay urgent bills, to cope with an emergency, to meet extra expenses, or simply to pay for a large-ticket purchase or a costly expense. 

If you’re planning to get a loan to renovate your home or pay for further education, you may be interested in a renovation loan or an education loan instead. Such loans are also considered personal loans, but you only use them for their stated purposes and not any others. 

For instance, a renovation loan can only be used to pay for the costs of renovation, and not to purchase furniture and appliances for your home. You may be asked to submit proof of renovation work done as verification.

People apply for a personal loan to get extra funds that they need, for a variety of reasons, as mentioned above. 

One reason why borrowers go for personal loans is because they have a lower cost of borrowing compared to credit cards and credit lines. This makes personal loans a more cost-effective solution for many.

Along with lower interest rates, personal loans also may be paid back over a longer duration, ranging from 12 months to 60, or even 84 months. This breaks up the amount borrowed into multiple smaller instalment sums paid once a month, making managing debt easier for those who need to borrow a large loan.

People may also apply for a personal loan because they see it as a better solution than wiping out their personal savings. By getting a personal loan with a reasonable interest rate, a borrower can pay for what they need while keeping their savings for emergencies.

To apply for a personal loan, you should first look up the different personal loans available in Singapore. Browse and compare different loan packages on SingSaver to get a sense of the average interest rates. This will help you gauge if a loan package is worth your while.

Enter your loan amount and loan tenure to see how much your monthly repayments would be. You can choose different amounts and tenures to find a monthly repayment amount that is comfortable or seems manageable for you. 

You should also check the eligibility requirements to make sure you qualify for the loan.

Once you have selected the loan you want, you can start the application process online. To do so, look for an “Apply Now” (or similar) button. Then simply follow the on-screen instructions to complete and submit your loan application. 

Once done, wait for your bank to inform you of the outcome of your loan application. If your loan is approved, you will receive the loan amount in your bank account. 

If your loan is not approved, you can check with the bank why. Depending on the reply you receive, you may consider reapplying, or try to apply for another loan from another lender instead.

See also: How to Check Your Personal Loan Application Status Online

Personal loans in Singapore have eligibility requirements that must be met for the loan to be approved. Typically, personal loans require:

• Age 18 and above

• Minimum annual income of S$20,000 or S$30,000 for Singaporeans and PR, S$45,000 to S$60,000 for foreigners

• Resident of Singapore, or with valid employment pass 

You will also be required to submit personal information, proof of income and other documents as part of your application. The most convenient way to do so is with SingPass - you can authorise the bank to retrieve the relevant details electronically. 

If you do not have SingPass, you will need to gather and submit copies of the required documents, whether via email, online or by post.  

Also, note that many banks require you to have a bank or credit card account with them when getting a personal loan. If you do not have such facilities, you will be asked to apply for them before applying for your loan.

This can be inconvenient, but is usually a one-time process. Alternatively, you may look for a personal loan that does not have such requirements. Note that you will still need to have a bank account in your name in order to receive the funds.

See also: How to get a Personal Loan without Proof of Income

The interest rate of your personal loan is crucial as it determines how much interest you have to pay on your personal loan. This might be a given, but the lower the interest rate, the better, which is why it is a good idea to compare different personal loans before getting one. 

You will notice there are two sets of interest rates attached to a personal loan. These are the advertised rate, and the Effective Interest Rate (EIR). Note that the EIR may be higher than the advertised rate, depending on the method used to calculate the loan’s interest. 

The EIR represents your true cost of borrowing, It is the rate you should look at when comparing between different loan packages. 

Note that the interest rate of a loan may vary according to the loan tenure.

The loan tenure is the duration over which you repay your loan. Personal loans in Singapore have loan tenures ranging from 12 months to 60 months. HSBC Personal Loan offers the longest loan tenure, up to 84 months. 

Understand that the longer your loan tenure, the more interest you will pay in total. This is because interest on a personal loan is charged per annum. 

A longer loan tenure can be useful, as it lowers the monthly repayment amount. Choosing a long loan tenure may help you manage better when borrowing large sums. 

The key is to choose a loan tenure based on a monthly repayment amount that you are confident you can meet. Try to find the best balance between “higher monthly payments for shorter” and “lower monthly payments for longer”.

If in doubt, paying more monthly to clear your debt faster is preferred, but only if it doesn't exceed your ability to pay.

It's not just the interest rate that matters but also the various fees and charges that come with personal loans. These can include early redemption fee, late payment charges, and admin or processing fees. 

Thus, besides comparing interest rates of these personal loans, you should also pay attention to the fees and charges attached to different personal loans. Remember that a loan with a low interest rate but high admin fee could turn out to be a worse deal than one with a slightly higher interest rate but no admin fee.

While personal loans can no doubt be beneficial, it's essential to also know the potential downsides to make informed decisions.

If you know how personal loans work, you would understand that when you secure a personal loan, the EIR provides a more accurate picture of the total cost, factoring in fees and the repayment schedule. Also, a lower credit score could potentially mean higher interest rates, increasing the overall cost of the loan. This is particularly pertinent if you're considering a personal loan as an alternative to other forms of credit that may offer initial lower rates. It's thus vital to understand the full terms of your loan, including how long you'll be paying back and what the total cost will be after interest is applied, to avoid any unpleasant surprises.

Taking on a personal loan requires careful budgeting to avoid spiraling into a debt cycle, especially with the high monthly payments. It's easy to overestimate your ability to handle repayments, leading to more borrowing and compounded debt, pushing you further away from financial stability.

Failing to meet the repayment schedule can result in significant penalties and affect your credit score, particularly with secured loans. Should you default on a secured loan, not only do you face the potential of a deteriorating credit score, but you also risk losing the collateral used to secure the loan—be it a vehicle, home, or other valuable assets.

Borrowing money can have a mixed impact on your credit score. Managed wisely, it can enhance your creditworthiness; however, borrowing beyond your means or failing to meet repayment deadlines can damage it. Additionally, applying for loans triggers hard inquiries into your credit report, which can temporarily lower credit scores.

Personal loans often stretch over years, requiring a long-term financial commitment. This extended repayment period can tie up your financial resources, limiting flexibility and increasing the cumulative interest paid over the life of the loan.

The allure of immediate liquidity may lead to borrowing more than necessary, which complicates your financial situation with unnecessarily high repayment obligations. It’s therefore crucial to assess the actual amount needed and avoid the temptation to maximise borrowing limits.

Some loan agreements come with terms that are not favourable to the borrower, such as high fees for early repayment or inflexible payment terms. Always read the fine print and understand all the clauses of your loan agreement to avoid being bound to unfavourable terms.

Your borrowing behaviour influences your credit report maintained by credit bureaus. Missed payments or excessive debt relative to your income can lower your credit score, making it harder to obtain future credit and potentially leading to higher interest rates on subsequent loans.

Bad credit scores aside, secured loans pose a significant risk of collateral forfeiture. If you fail to meet the repayment terms, the lender has the right to seize the collateral—whether it's property, vehicles, or other assets—used to secure the loan, possibly leading to financial and personal losses.

The choice between a personal loan and a credit card hinges on your financial needs and repayment ability. While both offer financial flexibility, each has its benefits tailored to different financial situations.

Personal loans often come with lower interest rates than credit cards, making them an economical choice for borrowing. This significant difference in interest rates can lead to considerable savings over time, especially if you're financing large sums or need a longer period to manage repayments.

Personal loans are particularly beneficial for covering larger expenses. In fact, most lenders offer loan amounts up to eight times your monthly salary, which can be a lifesaver for significant outlays like home renovations, major events, or consolidating higher-interest debts.

Unlike credit cards, the way a personal loan works does not involve revolving credit; once you receive the loan amount, it doesn't renew as you make payments. This setup prevents the common pitfall of continually adding to your debt, helping maintain a clearer path to becoming debt-free.

With a personal loan, you'll have fixed repayment terms, which usually translate into consistent, predictable monthly payments. This structure can simplify budgeting and financial planning, reducing the risk of surprises in your monthly financial obligations.

Credit cards, while convenient, often make it too easy to spend money you don't have. This can quickly lead to accumulating debt that may spiral out of control, especially with high-interest rates compounding on outstanding balances. In contrast, a personal loan provides a lump sum upfront, helping to keep spending in check and within planned limits.