With the rising cost of living, a Bloomberg report shows that 60% of citizens and residents find government measures inadequate, making personal loans a vital financial lifeline. Consequently, choosing the right personal loan is critical to avoid financial pitfalls.
Personal loans vary in interest rates, terms, and conditions, all of which can significantly affect your financial health. Therefore, it’s not just about obtaining funds but also ensuring the loan terms match your repayment capabilities.
When choosing a personal loan, it’s crucial to consider several factors to ensure it meets your financial needs. Here are some essential aspects to evaluate.
1. How Much Do You Need?
The amount you can borrow depends largely on your annual income and your residency status. Here’s how much you can borrow with traditional banks:
| Minimum Annual Income | Singapore Citizens (SCs) and Permanent Residents (PRs) | Foreigners Residing in Singapore |
|---|---|---|
| Less than S$10,000 | S$30,000 | S$500 |
| At least S$10,000 but less than S$20,000 | S$30,000 | S$3,000 |
| At least S$20,000 | 6X monthly Income | 6X monthly Income |
Here’s how much you can borrow with a legal money lender:
| Minimum Annual Income | Singapore Citizens and Permanent Residents | Foreigners residing in Singapore |
|---|---|---|
| Less than $10,000 | $3,000 | $500 |
| At least $10,000and less than $20,000 | $3,000 | |
| At least $20,000 | 6 times monthly income | 6 times monthly income |
2. How Much Are The Interest Rates? Can You Afford It?
Interest rates on personal loans can vary widely. Singapore banks usually offer competitive rates, but it’s crucial to compare different lenders. Personal loan products can have effective interest rates (EIR) ranging from 6.5% p.a. to up to 20.0% p.a.
The EIR of your loan will depend on the loan you apply for as well as your personal financial needs. However, the actual personal loan rate offered by the bank can vary by how much you’re borrowing, loan tenure, annual income, credit score, and your existing or new bank relationship.
Legal money lenders, on the other hand, can charge 1 to 4% interest per month. Understanding these rates is essential to avoid high costs over the life of the loan.
Tip: Don’t hesitate to ask for a lower interest rate, especially if you have received better offers from other lenders. Use these competing offers as leverage.
3. Can You Repay The Loan on Time?
The tenure of your loan affects both your monthly repayments and the total interest paid. Longer tenures reduce monthly payments but increase the overall interest, while shorter tenures do the opposite. Choose a tenure that aligns with your repayment capacity and financial goals.
Traditional bank personal loans can range between 1 and 7 years. Legal money lenders offer shorter loan tenures with only up to 12 months. Note that failing to repay a loan can negatively impact your credit score, making it harder to secure loans in the future. That said, while aiming to become debt-free quickly is commendable, it’s crucial to assess your repayment ability and choose a loan tenure that aligns with your financial situation.
4. Take Note of the Fees and Charges
In addition to interest, be aware of other fees. For instance, the processing fee is a singular charge imposed by the lender to cover administrative expenses related to processing your loan application. In Singapore, major banks charge 1-3%, with a cap. Additionally, banks may also charge late fee and early repayment fee.
Legal money lenders can charge a fee not exceeding $60 for each month of late repayment, a fee not exceeding 10% of the loan principal when granted, and legal costs ordered by the court for successful claims.
Always check for processing fees, prepayment penalties, and any other administrative charges. Here are a few tips to lower fees and charges:
- Compare the processing fees of various lenders in conjunction with their interest rates to identify the most cost-effective option.
- Request waivers for processing fees, prepayment penalties, or any other administrative charges.
Lenders might be willing to reduce or eliminate these fees to secure your business.
5. If You Can’t Repay The Loan on Time, Can Your Lender Give You Options?
Flexibility in repayment terms can be a significant advantage. Look for lenders that offer options like skipping a payment or extending the loan term without penalties. This can provide breathing room in case of financial difficulties.
Tip: Discuss options for flexible repayment terms, such as the ability to skip a payment or extend the loan term if needed. Ensure that any agreed-upon flexibility is documented in the loan agreement.
6. Are You Eligible?
Eligibility for personal loans usually includes criteria such as:
- Age (21-60 years)
- Minimum Income:
- For Singapore Citizens and PRs: S$20,000
- For Foreigners: S$40,000 to S$60,000
A stable income and proof of employment for at least one year are commonly required.
The documents required may vary per bank and financial institution. Here are the basic documents you need to prepare:
For banks:
- Copy of NRIC (front and back)
- CPF Contribution History Statement (Latest 9 months)
- Latest 1 Year Income Tax Notice of Assessment (NOA)
- Latest Computerized Payslip
For licensed moneylenders:
- Identity card / NRIC; or passport for foreigners
- Proof of residence (utility bill, a letter addressed to you, and/or tenancy agreement)
- Proof of employment (certificate of employment or 3 months recent payslip)
- SingPass ( to log into CPF, HDB, IRAS website)
7. What Is Your Purpose of Getting a Loan?
Be honest about your financial situation, highlight your stable income, and explain the loan purpose clearly.
Here are some common reasons why people opt for personal loans:
1. Debt consolidation
Consolidating multiple smaller loans with varying interest rates, terms and conditions, and repayment schedule into a single personal loan is always a good idea. It will save you a lot of time and stress. With debt consolidation, you will make your life easier with the repayments, you can also save money on interest rates if you obtain a personal loan with a lower interest rate than your existing debts.
2. Shoulder the expenses for home remodeling and other improvements
If you want to make improvements or remodel your home but currently don’t have enough funds to afford it, and you also don’t want to apply for a home equity loan, a personal mortgage is the best option. Whether you want to install new technology such as solar panels, want to add a new room, or remodel existing rooms, the costs can be shouldered by it.
3. Emergency expenses
Emergency expenses are unexpected. More often than not, you will have a hard time looking for money to pay for associated expenses if you don’t have enough savings. Hospital bills, funeral expenses, and other unexpected expenses can quickly add up to unimaginable amounts. If your expense is not covered by insurance, and your savings is not enough, this is your best bet to pay for the emergency.
4. Making a big purchase
Do you want to purchase a high-end computer but cannot save up enough money for it? Maybe it is too expensive for you, or it will take a long time to save up. Either way, borrowing to fund big purchases can be a good thing. You will get to enjoy using whatever you purchased with the money today, in exchange for paying interest rates and the money that you are supposed to save.
Sample Scenario
Consider the example below to see how different choices impact the total cost of the loan. Let’s say Mr. Kim needs a loan of S$10,000. He is considering two options from different lenders:
| Details | Lender A | Lender B |
|---|---|---|
| Loan Term | 3 years | 5 years |
| Interest Rate | 8% p.a. | 7% p.a. |
| Monthly Payment | S$313.36 | S$198.01 |
| Total Interest Paid | S$1,281.10 | S$1,880.60 |
| Total Cost of Loan | S$11,281.10 | S$11,880.60 |
Although Lender B offers a lower monthly payment, the total cost of the loan is higher due to the longer term and additional interest. Mr. Kim must decide if a lower monthly payment is worth the extra total cost.
Best Personal Loans in Singapore 2024
The best personal loan depends on your needs and financial situation. Look for low interest rates, minimal fees, and favorable repayment terms. Consider loans tailored to your specific purpose.
Here are some of the best personal loans in Singapore:
| Product | Loan amount | Interest rate (p.a) | EIR (p.a) | Processing fee | Loan Tenure |
|---|---|---|---|---|---|
| DBS Personal loan | Up to 10x monthly salary | From 2.68% | 5.43% | 1% | 6 months – 5 years |
| Standard Chartered CashOne Personal Loan | S$250,000 | 2.88% | 5.84% | S$199 | 1-5 years |
| UOB Personal Loan | Up to S$999,999 | 2.88% | 5.43% | 0% waver | 1-5 years |
| CIMB Personal Loan | S$30,000 and above | 2.80% | 5.28% | 1% | 1-5 years |
| Citi Quick Cash Loan | Up to 8x your monthly income | 3.45% | 6.50% | No fees | 1-5 years |
| HSBC Personal Loans | Up to 8x your monthly income | 2.92% | 5.50% | No fees | 1-7 years |
| POSB Personal loan | Up to 10x monthly salary | From 2.68% | 5.43% | 1% | 6 months – 5 years |
| Licensed Money Lender | Up to 6x your monthly incomes | 1% to 4% per month | N/A | S$60 | 12 months |
Checklist When Applying for a Personal Loan
In a nutshell, here’s a step-by-step guide to help you get started:
- Determine Your Loan Requirements: Calculate the amount needed based on income and residency status.
- Compare Interest Rates: Banks: 6.5% to 20% p.a.; Money lenders: 1-4% monthly.
- Evaluate Repayment Terms: Choose a tenure that aligns with your repayment capacity.
- Check Fees and Charges: Look for processing fees, late fees, and prepayment penalties.
- Assess Eligibility: Ensure you meet the lender’s criteria.
- Consider Flexibility: Look for flexible repayment options.
- Review Customer Feedback: Evaluate lender’s customer service quality.
Good to Know
1. What is a Personal Loan?
A personal loan does not require collateral and has no restrictions on how you can use the funds. As such, personal loans are more flexible compared to other types of loans such as mortgages, car loans, etc. For example, you are only allowed to use a home mortgage loan in purchasing or funding a house. You cannot use any part of the loan for any other expenses.
If you need to borrow to fund multiple expenses like travel, wedding, emergencies, payment for other debts, renovation, or purchasing new gadgets, a personal loan is the best to take.
2. How Does Personal Loan Works?
Personal loans are a type of instalment loan. This means that the amount is paid in instalments, usually every month, until you fully pay back the borrowed money and its corresponding interest and/or fees. The tenure of personal loans usually varies from 1 year up to 7 years. After your loan is fully paid, your account will be closed and you will need to apply again in case you need more money.
Importance of Credit Score
A credit score is a critical factor that lenders consider when evaluating personal loan applications. This score reflects your creditworthiness based on your credit history, including your payment history, outstanding debts, and length of credit history.
Droske, who is president of Illinois Credit Services, a credit counseling company, has long been obsessed with tracking his credit score. “The more you pay attention to it, the better your credit tends to be,” Droske says.
A higher credit score indicates a lower risk for lenders, which can lead to better loan offers. Applicants with high credit scores are often eligible for lower interest rates and more favorable loan terms, while those with lower scores might face higher interest rates or even loan rejections.
While money lenders (MLs) in Singapore don’t always require a high credit score for loan approval, maintaining a healthy score is still beneficial.
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Conclusion
Choosing the best personal loan in Singapore requires careful consideration of various factors such as interest rate, fee, and early repayment fee. By understanding the importance of your credit score and using comparison tools effectively, you can find a loan that meets your financial needs.
Key takeaways:
- Use online tools, such as online calculators and loan comparison platforms, to compare interest rates, fees, and terms from multiple lenders to find the best deal.
- A higher credit score can secure better loan offers and lower interest rates, while a lower score might lead to higher costs or rejection.
- Prepare necessary documents like proof of identity and income in advance to ensure a smooth and quick loan application process.
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