There has been a surge in demand for personal loans in Singapore during the past few years. This is the reason why I decided to discuss it here in my blog post to help people understand more about this financial product.
What is a personal loan? How does it work?
There are two types of loan: a secured and an unsecured one. The former is a loan that requires collateral in exchange for the money lent. Mortgages and car loans are the most popular examples of this. On the other hand, an unsecured loan doesn’t need collateral to get approved. The bank also won’t ask how you will use the money being borrowed. Personal loans belong to this latter category. Apply for a loan with highly rated money lender www.moneylenderreview.com.
An unsecured loan has a higher interest rate since the banks are assuming a higher risk in lending you money. They also have a shorter repayment period which usually falls between 1 to 5 years.
Now, you may be wondering how much you can borrow with an unsecured personal loan. With a secured loan, the amount depends on the estimated value of the collateral. But how about for a loan without any collateral?
In Singapore, the amount you can loan will depend on your monthly income multiplied by a certain number. The multiplier is determined by the bank based on their assessment of your financial capability.
So, if your monthly income is S$4,000 and the bank decides to offer a loan 3x your income, the total amount you can borrow is S$12,000. As you may already know, in addition to the loan interest which has a rate of around 9% to 18%, there are additional fees you have to think about when borrowing money from banks. Usually, this will cost you another S$50 to S$90 annually. In short, you’ll be paying more than S$12,000 if you decide to borrow the full amount.
Smart ways to use a personal loan
Since personal loans are easier to get, you might be tempted to use it for a holiday vacation or for buying that new gadget you’ve been eyeing for quite some time now. Considering the high interest rates and additional charges associated with a personal loan, it’s not a smart move to use it to finance leisure and entertainment expenses.
So is it altogether bad to get a personal loan? For what purpose is it okay to get one?
One situation where it can help you reduce the cost of your other loans is in debt consolidation. In debt consolidation, all your existing loans are merged into one to make it easier to repay them. Usually, consolidated debts have lower interest rates and better repayment terms than most types of loans.
Another instance where you can make better use of a personal loan is in covering another debt with a bigger interest rate such as credit cards. Credit cards are known to have the highest interest rates among financial products, which is why it would be better to pay it off first using a personal loan which has a much lower interest rate.
Probably the best way to use a personal loan is by spending it on something that will give you a brighter future. Funding a small business, paying for professional education, or investing in a rapidly appreciating asset are some of the situations where it’s wise to use borrowed money.
If you need help in getting a personal loan, make sure you compare all bank offers first before selecting the best one suited to your needs.