#1 Putting your money to good use
You can use a personal loan in any way you want. The operative word here is “personal”. When granting you a loan, the lender allows you to decide how to deploy the funds.
But you shouldn’t take this freedom lightly. For example, if you use the money from a personal loan to invest in the stock market. Your investment returns would need to exceed the interest on the personal loan. You will make a profit only if they do.
So, how should you use the funds from a personal loan? Possibly, the best way is to pay off high-cost debt. Consider a situation where your credit card outstanding carries an interest rate of, say, 25 per cent per annum, and your personal loan is at 8 per cent per annum. In these circumstances, a personal loan makes sense to help consolidate and pay off your debts in a timely manner.
Additionally, you could use the money for unexpected medical expenses, financial emergencies or home improvement.
Bear in mind that this is an unsecured form of borrowing. You probably won’t need to provide the lender with a guarantor or any other kind of security. This increases the cost of the loan because the bank doesn’t have any collateral to fall back on if you don’t pay.
How can you ensure that you get the best personal loan for your need? It’s essential to shop around. Take a look at the websites of different banks. Make a note of the rates that are on offer. You will probably approach the bank with which you have an account first. While there’s nothing wrong with that, don’t restrict your search to your existing bank.
When you’re weighing your options, remember to consider the following points:
- Interest rates may vary by loan amount or risk profile: Check with the lenders you’ve shortlisted to know how their rates vary with the size of the loan. Some banks vary their rates with loan size. So, if you’re debating about how much to borrow, you must remember to compare rates across different banks to see which is the best for your needs.
- Understand the difference between AR and EIR: When you are comparing interest rates, you are likely to come across these two terms — Applied Rate (AR) and Effective Interest Rate (EIR).
AR is calculated by assuming the loan principal remains constant throughout the loan tenure. This method of calculation doesn’t take into account the fact that each repayment results in the reduction in the principal amount. It’s not a very accurate representation of your interest cost.
EIR reflects the true cost of borrowing assuming you make payment on time. It is calculated after considering the gradual reduction in principal over the loan tenure. Remember to compare EIR too for the same loan amount and tenure of your personal loan.
Interest rate should not be the only thing that you have to check when you are taking a personal loan. There are other charges, as well. Here are a few that you should know about:
- Annual fees: Some banks charge a fixed sum every year. This is in addition to the interest you are required to pay. So, a five-year loan could mean five annual fee payments.
- Late payment fees: This clause deserves special attention. Lenders can be very strict when it comes to delays in payment. If you miss any instalments or pay less than the fixed repayment amount by the due date, late fee would apply similar to how it would apply to any other lending products (eg. credit card, home loan, car loan, etc).
Take the trouble to find out the bank’s charges for late payment. Your interest rate may be affected if repayment is made after the due date. Hence it is important to always pay your loans on time every time.
- Change in tenure fee: Not all Banks offer this service, so shop around to see who offers this flexibility. Say, you finalise your personal loan with a repayment term of two years. But after a couple of months, you realise that the monthly instalment is more than you can afford. The lender could allow you to extend the repayment period. But the change in tenure will probably involve an additional fee.
Banks consider several factors when deciding on a borrowing limit. Both the relationship you have with the bank and your credit score play a role in determining the maximum loan amount. However, one critical factor is your monthly income.
Here’s how it works. Firstly, there’s a minimum income requirement to be met. If this is 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. However, this restriction isn’t normally an issue as the upper borrowing limit could be as high as several hundred thousand dollars for those in the higher-income bracket.
What if you require a bigger loan? Say, you need a sum that is more than four times your monthly income. Some banks can lend you up to eight or ten times your monthly income. But larger loans like these are usually provided to borrowers in the higher-income bracket.
For many borrowers, speed can be an important consideration. How quickly will your loan be approved? When will you get the funds in your bank account? With Standard Chartered Bank (Singapore) Limited’s CashOne Personal Loan, funds can be disbursed into your Standard Chartered Bank (Singapore) Limited (“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.
This varies from lender to lender, so it’s important to fully read and understand the terms and conditions of your loan when you apply. Applying using your MyInfo or getting your documents ready upfront can also help speed up your application processing.
Some people give this issue a low priority. After all, trustworthiness could be vital if you’re depositing money with a financial institution. You would want to be sure that you’d get your cash back. But why should it be a consideration if you are the borrower?
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. This could result in a dispute. You may even have to face 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. It’s also a good idea to reject offers from lenders that have a poorly designed website. A website that isn’t secure (a little lock doesn’t appear in your browser) or one that carries only old blog posts should also raise a red flag.
Deal only with reputable organisations. Ensure to check how long the financial institution has been in existence, and whether it’s a well-regarded organisation. A big bank with a strong brand could 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. When you borrow from the financial institution, you promise to pay them back in 1/2/3/4/5 years. The lender is expected to make a profit for this period. Now you’re saying that you want to pay early. They’re going to lose a part of their anticipated profit. The lender would want to recover at least some of this when you close the loan early. So, they’ll charge you 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. Sometimes, it’s a combination of the two.
If there’s a chance that you may need to prepay your loan, 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.
How will the reduction work? Initially, the personal loan amount will be deducted from your credit card limit. Subsequently, this limit will be gradually restored as you repay your loan instalments.
Any form of borrowing be it credit card or personal loan 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 be it a secured lending product such as a car loan or home loan.
You can access your credit bureau from time to time with a small fee.
This is the key issue that you must consider. How much will you have to repay every month? What is the impact that your personal loan repayments will have on your monthly budget?
When you are in the process of applying for a personal loan, one of the first questions that could come to your mind is, “How much will the bank lend to me?” However, this isn’t the correct approach from a borrower’s perspective. Instead of asking how much you can borrow, you should ask yourself, “How much do I need and afford to repay every month”?
Most banks will determine your personal loan limit based on your monthly income. So, if your monthly income is $5,000, you could be eligible for up to $20,000 loan. That’s four times your monthly income.
But you should remember that this might not be the right amount for you. It doesn’t take your specific circumstances into account.
How should you decide? What is the maximum amount that you should borrow?
Here are the factors that you should take into consideration:
- How do you use your monthly income currently? What is the amount that you spend on essentials?
- What will be the monthly instalment on the personal loan that you propose to take?
- Will the remaining amount be sufficient for your daily needs?
Carry out a quick review of your spending pattern over the last few months. Now see the impact that a personal loan will have. Decide on how much and how long to borrow only after you conduct this review.
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. This form of borrowing is also recommended for paying off high-cost debt. You can save money on interest costs.
But don’t make the mistake of over-borrowing. Delaying repayments can lead to an additional interest burden.
Find out more about Standard Chartered’s CashOne Personal Loan
This article is brought to you by Standard Chartered Bank (Singapore) Limited. All information provided is for informational purposes.