Personal Loans in Singapore – Application Guide for Beginners
Personal loans in Singapore
“Money is not enough” is a common refrain many of us hear, even more so these days when inflation bites harder than a Rottweiler.
While looking for ways to fill up your bank account, you may have come across personal loans and wondered if they were the equivalent of borrowing from your best friend.
That’s only half true – these loans are indeed for personal use, but they’re not just about being an easy way to get cash. Read on to find out what personal loans are, and if they could be our best friend as much as these adorable dogs.
What is a personal loan?
Personal loans are what you borrow from banks and financial institutions for your own use. Whether it’s splurging on that guilty pleasure, donating to a good cause, or stuffing it under a pillow, you’re generally free to do whatever your heart desires with the money. – although in terms of financial discipline, it may not be wise to abuse borrowed money.
There are 2 types of personal loans in Singapore: a term loan and one revolving loan.
If you’re looking for stability and certainty, a term loan may be right for you. This is where a bank lends you a single sum with all the terms agreed in advance for the duration of the loan:
- Interest rate: Typically 6%-8%
- Repayment period or duration: Usually 1 to 5 years
- Monthly payment.
Here is an example :
Tip #1: Many banks offer a lower interest rate for a longer loan term. But that often means a larger overall refund. For example, following the example above, a 5% annual interest rate over 4 years would instead mean a higher overall interest of $2,000.
Tip #2: You can request an early full refund. But the bank may charge a fee for early termination of the loan to compensate for the loss of interest income.
Consider a revolving loan if you prefer a more fluid and flexible way to manage your loan. Also called a personal line of credit, this type of loan acts like a credit card.
You can withdraw partially or completely from a pre-approved credit limit, and interest only applies on the amount borrowed. How much to repay each month is up to you, and whatever you return will replenish the loan amount so you can continue borrowing without an end date. Although banks generally impose a minimum monthly payment.
The catch to such flexibility is that these loans carry a higher interest rate compared to a term loan, typically 18% to 20%.
The example below shows how a revolving loan works with a credit limit of $10,000:
Tip #3: It can be tempting to roll over the outstanding amount each month. But like credit card bills, it can snowball quickly due to the high interest rate. A rule of thumb is to pay off as much and as soon as possible, because unlike term loans, there are no prepayment charges.
What happens when you default on a personal loan
Part of what makes personal loans attractive is that they are an unsecured form of borrowing; you don’t need to provide collateral or have a guarantor to get your hands on the money. If you don’t repay a loan, the bank can’t seize your property, unlike a home or car loan.
But that doesn’t mean it’s your get out of jail card. Failure to pay your loan can seriously affect your credit score, which measures the likelihood of you repaying your debt and is derived from information provided to the Credit Bureau Singapore (CBS) by your credit providers like banks and finance companies. A bad credit score can affect your future loans and even your job prospects.
In more serious cases where the bank believes you are intentionally withholding payment, they may also take legal action against you.
Why you might need a personal loan
Loans for items like housing, renovation and cars can only be used for the specified purpose. Often the bank pays the money directly to the contractor or dealer, bypassing the borrower altogether.
On the other hand, a personal loan will right in your pocket and offers much more free play in how you spend the money. You can choose to use it in one sitting or split it for different expenses like:
- Medical or other emergencies
- Milestones or lifestyle choices, e.g. weddings, vacations, big ticket items like electronics
- Small business or side business
- Debt consolidation – using a personal loan to pay off other unpaid debt with a much higher interest rate, for example, credit cards
That said, carefully consider the good and the not so good, as shown below:
- flexible use
- Not guaranteed
- Lower interest rates than credit cards
- Higher interest rate than specialized loans for housing, car, renovation, education, etc.
- Harder to maintain payment discipline, and defaults could affect your credit score.
How much can you borrow?
For a lender, nothing else matters except your ability to repay the money on time. Your income and credit score will go a long way in determining how much you can borrow.
For banks, that typically means 2-6 times your monthly salary, capped at $200,000. Separately, Approved Lenders must adhere to the following lending limits set by the Ministry of Justice:
Tip #4: In addition to a larger loan, a good credit rating can also allow you to take advantage of a better interest rate.
Where and how to apply
Our government closely monitors personal loans in Singapore, and no one can grant such loans. The banks and approved lenders are legal and by far the most popular options.
Although most require in-person applications, some banks allow you to apply online if you are an existing customer. Typically, they will ask you for proof of your identity, address and income. Lenders might also check your credit score with CBS.
Your age, nationality and income are the 3 most important criteria when it comes to assessing your eligibility for a loan. Here are the general guidelines:
What is less known is that banks also tend to prefer a minimum credit score of 1825. Therefore, before applying, it is advisable to check your credit score with CBS. You can buy your credit report from them for a nominal fee of $6.42 with GST.
In addition to the loan amount, interest rate and term, it also helps to clarify with the lender from the outset all “hidden” costs such as:
- Processing fee
- Late payment fees
- Default interest
- Prepayment charges
Approval and disbursement can take up to 24 hours if all documents are in order and you are deemed creditworthy.
Take a personal loan in Singapore
As with all things money, it pays to be careful when deciding if you need a personal loan and which lender to turn to.
Most often, these loans serve as short-term financial support. Borrow within your means and you may find that these can indeed be a handy companion if and when you need them.
Learn more about finance for beginners: