Personal loans are very different from other forms of credit, like housing or vehicle loans. They do not require pledging collateral, and for that reason, have higher interest rates as well. However, the interest rate on a personal loan is not higher than that on a credit card.
As a result, a lot of Singaporeans are resorting to credit card debt consolidation by taking out personal loans from banks and licensed moneylenders. Unlike home and car loans, how you use the money is entirely up to you. Here are 5 tips to know before getting a personal loan.
1. Avoid taking a personal loan just before a major loan
If you are planning to go for a major loan in the near future, avoid taking a personal loan a few months before. The reason is a key factor called Debt Servicing Ratio (DSR). This is an indication of how much of your income can be diverted towards a car or home loan, and any other previous personal loans. Piling on personal loans can reduce your DSR, and render you ineligible for the home loan amount you have in mind.
2. Research and compare to get low interest rates
Interest rates of personal loans fluctuate on a daily basis, so you must always be on the lookout for a good deal. A bank that offered a low interest rate a few months ago needn’t necessarily offer the same rate. Look for banks that low on borrowing clients, because they are likely to give you better rates, flexible repayment terms, and even other freebies. If you don’t know how to do it, or are simply short on time, borrow from a licensed moneylender.
3. Choose the right lender for your requirement
Choosing the right financing source is half the job done. Your options include credit unions, banks, and licensed moneylenders. Terms of repayment and interest rates vary across these institutions. Banks charge marginally higher than credit unions, but the advantage of borrowing from online lenders is that they provide easy approval. The Singaporean government has recently put a 4% cap on the interest rates charged by moneylenders, making repayment easier.
4. Do not over-borrow
Qualifying for a higher amount that you require can be gratifying, but it is generally advised against. The reason is that you will end up paying extra interest on money you don’t need, which will lead to further complications. Personal loans also carry late payment penalties, and your focus should be to borrow only as much principal as you can pay interest on. Personal loans should also not be used as business loans or for high-risk investments.
5. Be prepared with the documentation
In order to get your money quick, arrange your documentation in advance. Both banks and lenders ask for a few documents for the loan approval process. Banks also require a healthy credit rating to be sure that you can pay off the loan easily. Commonly asked for documents include pay slips, a copy of your passport or NRIC, income tax assessment reports, and so on. However, if you need the money urgently, contact a licensed moneylender. They don’t require a robust credit score and have a very short approval process.