Everyone faces some degree of financial uncertainty in their lives, some more often than others. The most common solution for most of us is to obtain a personal loan in Singapore. This can be in the form of a casual arrangement with a friend or relative or a formal loan from a bank or licensed money lender.
Formal loans come with specific criteria for repayment, including the additional cost of interest above the loan principal, processing or administrative fees, and a loan repayment period (i.e. loan tenure) where the borrower has to continually make repayments until the loan is paid off.
Curious? Read on to learn more about everything you need to know about personal loans in Singapore, what you should look out for and how to make the best choice for your needs.
When it comes to personal loans, an individual borrows a sum of money for a specified period at a fixed interest rate and pays a fixed monthly payment throughout the loan tenure.
A personal loan can be used for anything you desire, and there is no need to disclose what you would be using the loan for.
While personal loans should ideally be taken only to fund real, pressing needs when one lacks cash on hand, some people use personal loans to fund their dream wedding or a vacation of a lifetime.
There are secured personal loans, but unsecured personal loans are the ones most commonly used.
Secured personal loans will require some collateral for security on the part of the lender, whether in the form of a cash deposit or some other asset (e.g. jewellery, car, home). Unsecured personal loans, on the other hand, do not require any collateral.
Consequently, it only makes sense that interest rates on secured personal loans are lower compared to unsecured personal loans since lenders carry higher risk should non-payment occur and they do not have the borrower’s collateral to fall back on.
The amount of money lent to a borrower shall depend on the lending institution as well as other considerations like the duration of the loan, your credit history and income, and sometimes, your relationship with the lender.
For personal loans from banks, borrowers can borrow up to 4X – 6X monthly income if they meet the minimum income requirement and earn less than $120,000 per year. If they earn $120,000 or more per year, most banks in Singapore allow them to borrow up to 10X monthly income.
For personal loans from licensed money lenders in Singapore, how much you can borrow is also dependent on your income. You can expect to borrow up to 6X monthly income if you earn at least $20,000 per year regardless of whether you’re a Singaporean, Permanent Resident, or Foreigner.
The short answer to that question is — so you don’t throw away your hard-earned money. If your interest rate is higher, your cost of borrowing will naturally be higher. The reverse is true.
It pays to compare personal loan interest rates. Remember, a seemingly minuscule difference of just 0.1% can snowball into a significant amount throughout the loan.
Apart from where you would be getting the personal loan from, interest rates can vary pretty drastically. Foremost, they are not static and depend on several criteria.
The first of these is the prevailing economic environment; interest rates are usually lower during a recession and higher during an economic boom.
An applicant’s financial standing, level of debt, employment status, credit score, and recent financial history all affect the interest rates on a loan, too.
Before applying for a loan, you should also consider whether a loan from a bank or licensed money lender is the better option for you. If you are facing financial problems, an urgent cash loan can help you ride through a rough period.
The typical interest rate charged by licensed money lenders varies between 1% and 4% per month. This upper limit of 4% is a figure set by the Ministry of Law.
However, a licensed money lender is allowed to charge an additional late interest rate of 4% per month on overdue payments. They may also impose a late repayment penalty fee, capped at $60 per month. A processing fee of up to 10% may also be imposed when you take up the loan.
These are some factors that may affect interest rates offered to borrowers:
- Credit score – based on the current and recent financial history of the applicant
- Income – a higher income generally indicates a lower-risk applicant
- Credit utilisation with other lenders – every person is given a debt limit and the closer to that limit they get, the higher the risk
Licensed money lenders do not use a flat rate method to calculate interest. Instead, they apply the reducing balance method. While the calculations may be simpler with a flat rate, the reducing balance method saves you money.
Let us consider an example where a borrower takes a $3,000 loan to be repaid in 3 months.
|Beginning balance amount
The total amount paid over 3 months is $3,007.50, including interest amounting to $7.50.
|Beginning balance amount
The total amount paid over 3 months is $3,005.00, including interest amounting to $5.00.
All else equal, the borrower would have paid 50% more interest using the flat rate method.
Bank loan interest rates generally range from 3% to 6.5% per annum on paper. After including fixed charges, processing fees, and other miscellaneous expenses, the effective interest rate (EIR) may rise to between 5.7% and 14.7% p.a.
As with all loans, you should consider the fine print and not just the advertised rates. The most important piece of information you need is the EIR as it tells you your true cost of borrowing.
The effective interest rate (EIR) gives you a more accurate impression of the cost of your loan than just the advertised rate. It factors in costs such as processing or administrative fees.
Let us again consider an example where a borrower takes a $3,000 loan. The interest rate is 10% p.a. but there is a bank processing fee of 1%.
The total amount to be repaid = Principal + Interest + Processing fee = $3,000 + $300 + $30 = $3,330
The EIR here is 11% despite the advertised interest rate of 10%.
Loans can be a wonderful tool for financial independence if you make good use of them. Otherwise, they can become a source of additional financial stress instead.
Always be aware of the additional costs of a loan. These may include:
- Late payment interest rates
- Late payment penalty charges
- Administrative fees or processing fees
There are also other factors to consider:
Banks typically immediately refuse a loan to anyone with a poor credit rating. Licensed money lenders, on the flip side, are more lenient in this regard. Licensed money lenders are more willing to offer loans to borrowers with poor credit.
However, loans from licensed money lenders are more expensive compared to those offered by banks. Therefore, if you can, always try to obtain a bank loan first.
Not all licensed money lenders are the same. Some offer greater flexibility and better terms than others. It’s important to choose the right money lender for yourself. Do your research and read up on their reviews online.
Scrutinise and digest all the fine print on anything you read, sign, or might sign with a bank or licensed money lender. Ask questions about anything you do not understand whether it be the jargon used, loan repayment schedule, or total interest chargeable.
We understand that choosing the right personal loan and comparing rates can be time-consuming and confusing if you aren’t the most familiar with such concepts. This is why we are here to help.