You can use a personal loan in any way you want, but you shouldn’t take this freedom lightly. So, how should you use the funds from a personal loan?
The best way is to pay off high-cost debt. Consider a situation where you are paying 25% p.a. or more on your credit card outstanding balance. If you are able to apply for a personal loan at 8% p.a., it would make sense to use it to help consolidate and pay off your high-cost debts.
Other reasons to take up a personal loan include unexpected medical expenses, financial emergencies and home improvement.
It’s inevitable that you will come across these two terms — Applied Rate (AR) and Effective Interest Rate (EIR).
AR assumes the loan principal remains constant throughout the loan tenure, and doesn’t take into account the fact that each repayment results in the reduction in the principal amount.
EIR reflects the true cost of borrowing if you make payment on time. It is calculated after considering the gradual reduction in principal over the loan tenure. Remember to compare EIR based on the same loan amount and tenure.
Interest rate should not be the only thing to check when you are taking a personal loan. There are other charges, and here are a few that you should know about:
- Annual fees: Some banks charge a fixed sum every year in addition to the interest you are required to pay. A five-year loan could mean five annual fee payments!
- Late payment fees: If you miss any instalments or pay less than the fixed repayment amount by the due date, a late payment fee would apply. This deserves special attention as lenders can be very strict when it comes to delays in payment.
- Change in tenure fee: Not all banks offer this flexibility, but here’s a scenario to show why it’s important – You’ve successfully applied for your personal loan with a repayment term of two years, but due to some changes in circumstances, the monthly instalment becomes more than you can afford. It would be helpful if you’re able to extend the repayment period for an additional fee.
Banks consider several factors when deciding on a borrowing limit, such as the relationship you have with the bank, your credit score, and more importantly, your monthly income.
Here’s how it works. When the minimum income requirement has been met, an individual may be allowed to borrow up to four times the sum that he or she earns in a month. But someone earning less than $30,000 per year could be limited to twice his or her monthly income. There’s usually a cap on the dollar value as well.
What if you require a bigger loan? Some banks can lend you up to eight or ten times your monthly income, but these larger loans are usually provided to borrowers in the higher-income bracket.
For many borrowers, speed is an important consideration. How quickly will your loan be approved, and when will you get the funds in your bank account? This varies from lender to lender, so it’s important to find out before you apply. Applying using your MyInfo or getting your documents ready will also help speed up your application processing.
With Standard Chartered’s CashOne Personal Loan, funds can be disbursed into your Standard Chartered Current/Cheque & Save Account almost immediately or any existing bank account of your choice within 15 minutes¹ from your loan being approved when you apply for it online².
Some people give this issue a low priority but it’s critical to deal with reliable and well-established lenders that offer full transparency.
Consider a situation where you take a personal loan from a money lender that is disorganised and has poor record keeping. They could lose track of the repayments you have made, resulting in a dispute. You may even end up facing harassment from a collection agent even though you aren’t at fault.
So, how should you select a lender? Stay away from companies who promise you a personal loan without checking your credit history, and only deal with reputable organisations. A big bank with a strong brand would be your best bet.
Wait a minute. Why should the bank charge for early repayment? They’re getting their money back before it’s due. In fact, they should give you a discount!
Sorry, but it doesn’t quite work that way. By paying off the loan early, the lender is going to lose a part of their anticipated profit and would want to recover some of this with an early repayment fee.
How much should you expect to pay? Early repayment fees are usually calculated as a flat dollar amount or a percentage of your outstanding loan. If there’s a chance that you may want to pay off your loan early, check this point carefully.
Are you planning to take a personal loan from the same bank that has issued you a credit card? If you are, it’s likely that your available credit card limit will be reduced by the personal loan amount.
This isn’t necessarily a bad thing. It will help you to keep the total sum that you borrow within a reasonable limit. This limit will be gradually restored as you repay your loan instalments.
Any form of borrowing can impact your credit score. If you borrow a reasonable amount and pay on time, your credit rating may improve, however, it also depends on a variety of other factors. You can access your credit bureau from time to time with a small fee.
This is the key issue to consider: What is the impact that your personal loan repayments will have on your monthly budget?
Most banks will determine your personal loan limit based on your monthly income, but that might not be the amount you need. Instead, you should ask yourself, “How much do I need and afford to repay every month?” and consider:
- How do you use your monthly income currently, and how much do you spend on essentials?
- What will be the monthly instalment on the personal loan?
- Is the remaining amount sufficient for your daily needs?
Review your spending pattern over the last few months before deciding on your loan amount and tenure.
The bottom line
Personal loans provide an excellent way to raise cash quickly. If you need money for medical expenses or some other emergency, a personal loan can provide the best solution.
Whatever your reasons are for taking up a personal loan, be sure to go through the fine prints of the product and fully understand the repayment details based on your loan amount and tenure.
Find out more about Standard Chartered’s CashOne Personal Loan
This article is brought to you by Standard Chartered Bank (Singapore) Limited (“Standard Chartered”). All information provided is for informational purposes only.