Personal Loans: A Beginner’s Guide

“You must gain control over your money or the lack of it will forever control you. — Dave Ramsey

If you had a dollar for every time you feel bad about money, you’d be having supper with Beyoncé at Noma right now, and not reading this article as a result of Googling “personal loans” on your pre-loved Ikea sofa which you scored on Carousell.

With it comes the freedom to live the life you desire. You’re the master. Without, you’re the slave, coerced into doing things you don’t like to make it through another day — like having to take a loan and being in debt.

Money: Friend or foe?

If it’s “foe” you just muttered, what happened? What got you here? Did you not set up a savings account from the day you got your first paycheck? Have you been spending more than you’re earning, digging a bigger and bigger hole in your finances, one Chanel bag at a time, in order to fill a hole of the emotional kind? Or perhaps, through no fault of yours, life has not been kind — it has pulled the security rug from under you with an illness, retrenchment, an accident, something that is taking a toll on your finances. Whether you are determined to mend your over-spending ways and get back into the pink of financial health or you’re trying to make ends meet due to unfortunate events, a personal loan could come in handy. If you’re new to this, it’s a good thing you’re doing your research now. Here are a few things you should know so you know what you’re getting yourself into.

First of all, what is a personal loan?

A personal loan is an “unsecured loan”, which means you don’t have to put up collaterals (such as your house) or a down payment in exchange. Since its personal, it also means you have the freedom to use the money however you like to. (Might we suggest, cautiously.)

As soon as your application is approved, you will receive the cash in a lump sum.

The amount of money, plus interest, is to be paid back in installments over a period of time. The duration your repayments is determined by the terms of your chosen loan. So far, it sounds good. But bear this in mind: Personal loans, because they are unsecured, come with high interest rates. If you default on your repayment, it will not only cost you, but it will also affect your credit score.

As you know, we’re all about empowering you to make sound financial decisions, so let us stress that unless it is absolutely necessary (a pair of Manolos do not qualify), you should consider very carefully before getting yourself in debt. Some “necessary” and emergency situations we can think of include sudden illnesses for which your insurance does not sufficiently cover, or when you need a bridging loan between selling and buying a home.

Types of personal loans:

• Personal Installment Loan
• Credit Line
• Balance Transfer

Personal Installment Loan

A personal installment loan is a type of loan that lets you borrow a specific amount of money which you have to pay for over a period of time. These have a fixed interest and fixed monthly repayments which makes it easy to plan your budget. The length of time needed to pay the loan can be as short as a year to as long as seven years. This gives you the ability to bring down the cost of your monthly payment. Since this is a multi-purpose loan, you can use the money however you please (but may we suggest you do so with caution and discipline.) For example, you can borrow up to four times your monthly salary (or eight times if your annual income is above S$120,000) with POSB Loan Assist.

Credit Line

Think of this like a hybrid between a credit card and some kind of personal loan. A credit line allows you to borrow up to a fixed amount (usually two to four times your monthly income), on an ad-hoc basis. There is no need to state a reason for the loan–just call and request the money, or apply online. In many cases, a credit line can give you an approved loan in as little as 15 minutes.

You can repay this loan amount in a flexible manner. You are only required to make a minimum repayment (often S$50 or 2.5% of the borrowed amount, whichever is lower) on each billing cycle.

Some credit cards offer 0% interest installment plans, but be careful not to end up borrowing more than you need. While the benefit is that there is no fixed repayment scheme, the interest rate on credit lines is higher and more variable than most personal loans, so we would suggest making full repayment as soon as possible.

Balance Transfer

A balance transfer is similar to a short-term (three to 12 months) 0%-interest loan commonly offered on a credit card or credit line account. As the name suggests, a balance transfer allows you to transfer all your outstanding balance to a low or 0%-interest rate loan.

This means that you can avoid paying the high interest rate of 19% – 26% that would be charged to your credit card or credit line debts. This also lets you consolidate all your debts in one account.

Alternatively, a balance transfer can be a source of emergency funds. Singaporeans who have a large emergency expense can take advantage of the low or 0% interest rate if they can confidently repay the full amount within that grace period.

Since balance transfer is a service offered on top of a credit card or credit line, the bank will open either a new credit card or credit line account for you.

In the end, no matter which loan you decide to take out, the borrowing limit will be determined by your income. Word of advice: Don’t borrow more than you can afford, and borrow responsibly. Gather all the information you need before making the decision, as well as read the fine print carefully. Always read the fine print. Finally, allow us to leave you with the wise words of Seneca: “It is not the man who has too little, but the man who craves more, that is poor.”