Personal loans are growing in popularity in Singapore. People here take out personal loans to cover the following expenses:

• Covering basic living expenses
• Help family and friends
• Financing a mortgage
• Buying car
• Consolidating debts
• Financing medical expenses
• Paying for wedding expenses
• Other personal expenses 

With a personal loan, you can borrow money from a bank or a financial institution and repay it on a fixed installment basis over an agreed term with the lender. As compared to a credit card facility, a personal loan can save your interest while funding life’s big purchases.

Before going forward, we must check if a personal loan is a ‘good debt’ or a ‘bad debt’. A good debt is one that promotes your financial health in the long run. Whereas, bad debt is the money you borrow to purchase consumer goods or assets which may quickly depreciate in value or do not provide any financial value at all. In the long run, these kinds of debt aren’t going to serve you in any manner. The personal loan falls under the category of ‘bad debt’ because you can only serve your immediate cash needs and not earn any benefit in the future.

However, a personal loan is still an affordable option to credit cards but it definitely needs a proper repayment plan to ensure your credit score isn’t adversely affected.

What are the criteria for a personal loan in Singapore?

LoanBuddy lists down 10 important questions you need to ask before obtaining a personal loan and take the right decision

1. How much money do I need to borrow?

The first and foremost factor while choosing a personal loan is determining the cash quantum you need. You can borrow for as low as $10,000 in Singapore from the most popular personal loan provider in Singapore. These include UOB, SCB, DBS, HSBC, Citibank, and many others. You need to prepare a budget statement of particular needs for which you need money. A personal loan obtained without considering the monetary limit requirement can drain your monthly income and savings in the long term. Therefore, you must be determined as to how much money you actually need to cover the particular expenditure.

2. Why do I need the loan?

There can be many reasons you may want to borrow money. It could be a medical urgency or an unexpected financial setback. Not only this but paying off a high-interest-rated debt also makes sense. For example, if you already have a credit card loan at 20% interest per annum, it would be a good choice to get a personal loan at 10% interest to consolidate your credit card debt and save interest charges by paying it off first. You can go ahead with a personal loan if you believe this would significantly reduce your applicable interest year on year.

All you need is to be very specific when it comes to deciding the purpose of getting a loan.

3. What is the interest rate under different options?

As said earlier, a personal loan can be taken for different purposes with a reduced rate of interest as compared to expensive options out there. However, you should not forget that the Singapore loan market is very diversified, it not only offers a personal loan to finance different expenses but also offers a specific category of loans to finance specific expenses such as house loans, car loans, education loans, business loans, debt consolidation loans, and so on.

So jumping to a personal loan can be risky if you haven’t really explored other available options. The interest rate on every loan varies depending upon the nature of the expense and risk involved. So you must shop around different options to check if a particular loan can finance your expense with a relatively lower interest rate.

4. What are the other rates I need to check?

When you think of the interest rate, you think of it as a percentage charged on the principal amount of the loan. Banks do charge interest to make their profit. However, besides interest rates, there are rates like APR and EIR. An APR is calculated after considering multiple fees and charges involved in a loan on the base rate. It should always be lower than the interest rate. The EIR calculates the reduction in principal after you have repaid the installments. You should carry out more research if you are not aware of these terms to make the right decision.

5. What are the other charges I need to check?

As said, there can be other charges in addition to the interest rate charge. Possible charges a bank may ask for are- a fixed annual fee tied to the borrowed amount, late payment charges if any repayment is not done on time, and any medication fee if you renegotiate the loan terms and reconstruct it.

You should be aware of the early repayment charges as well that few banks charge because it affects their portion of anticipated profits. Before you move forward with your personal loan application, beware of these charges to avoid any extra charges that could be avoided.

6. Can I handle the repayments If I take up the personal loan?

Before deciding to go for a personal loan, asking this question is essential. Without checking your capacity to repay the loan, taking it can be a disastrous decision. After knowing all the extra fees, interest rates, and budgeted monthly repayment amounts, you must make a necessary calculation to see if you can afford to pay from your monthly income.

We suggest you write out a detailed budget considering all your spending needs on household bills such as electricity, water, groceries, and other miscellaneous expenses. From the breakdown, you will be able to see if you have sufficient funds left over to service the repayment of the personal loan and even finance the unexpected financial crunches.

Click here to read Pros and Cons of Debt Consolidation

7. How is it going to affect my credit score?

A credit score is a very important tool to check your creditworthiness when it comes to borrowing loans. It is a base for lenders to decide whether you deserve the loan or not. All banks and financial institutions in Singapore check your credit report to construct loan terms, interest rates, and principal limits.

An unhealthy credit score will not allow you to borrow a large amount of money with flexible terms. This is why you should watch your credit history, DTI (Debt to Income) ratio, age, and the number of accounts you have owned in your entire life. A derogatory credit report adversely affects your credit score which in turn doesn’t let you fund your most important expenses.

If any time you make a little delay in repaying your personal loan, it’s going to print in the credit score and will affect your future borrowings. So if you think you can do without a personal loan, then why not skip it? Maintaining a good credit score in Singapore will help you fetch better loan deals in the future.

Click here to read How Do Credit Scores Affect Business Loan Approval?

8. Is the lender reliable enough to answer my questions?

Some of the financial institutions fail to run credit checks and cannot answer basic questions of potential borrowers. You have to be mindful while choosing the lender. Considering non-financial factors along with financial ones is suggested. You should clear every doubt of yours to avoid any conflict in the future. Any lender who is not capable enough to respond to your queries should not be selected at all. You should select a bank or financial institutions that carry out required credit checks before issuing any loan, not the one that agrees to lend you money without conducting a proper review of your credit report.

9. How long will it take to get the funding?

Almost every person who wants to fund their immediate cash requirements wants a faster loan procedure. Some of them are running against time. If you belong to one of them, you need to find out how long the loan procedure lasts. The procedural speed of loan disbursement may vary from bank to bank, hence you must choose the fastest one if you can’t wait for the application to take much time.

10. Know your Needs and Wants

Borrowing a personal loan is highly dependent upon one’s needs. However, one needs to bifurcate the ‘needs’ and ‘wants’ before applying for a personal loan. Any individual should take a personal loan only when it’s ‘needed’ and not out of ‘wants’. Why? Because it comes with a price to pay. You need to make repayments and pay monthly interest. A loan taken out to satisfy your short-term financial desires is a foolish action.

Do your sums first even if you need a personal loan in extreme situations. You must evaluate the interest rates, loan terms, and repayment terms to avoid extra costs.