Are personal loans the answer to your money problems?

Money problems are no fun; they are stressful to deal with, difficult to talk about and could even strain relationships that matter. Should you consider utilising a personal loan to tide things over? Learn more about personal loans and how they could help make each dollar of yours go a little further.

While not everyone may be open to the idea of taking out personal loans when faced with money problems, this credit offering could be your lifeline should you find yourself urgently in need of extra cash due to certain unexpected reasons or circumstances.  

Personal loans 101: What they are and how do they work

Personal loans are a type of loan that individuals can apply for no matter their intended use if they meet the eligibility criteria.

Factors like your monthly income, creditworthiness, ability to repay and other loan commitments determine whether or not the banks will let you take out a personal loan, as well as the amount you can borrow. 

ALSO READ: Understanding personal loans: When should you use it?

Depending on your income and what the banks are offering, you could borrow up to four to eight times your monthly salary, though the higher loan thresholds are reserved for high-income earners who make $120,000 or more annually. 

Like credit cards, personal loans are unsecured loans – you don’t need to back your loan with collateral, such as your home or car. That said, you – the borrower – are still liable for repaying the amount you have borrowed, along with interest and other fees and charges that apply.

A fixed monthly repayment that includes interest is to be serviced over your chosen loan tenure, usually between one to seven years.

Personal loans could help you save on interest payments

Instead of just swiping your credit cards mindlessly and hoping for the best, why not consider personal loans? Nobody says you can’t be smart(er) with your money!

Personal loans have relatively lower interest rates (3.5 per cent – 10.8 per cent p.a.) than the hefty 26.9 per cent p.a. interest charged on credit cards in Singapore. 

Here’s an example of a $5,000 personal loan vs $5,000 credit card debt, assuming there aren’t any additional charges to the credit card and you pay $200 per month without fail before the due date:  

3 tips on using personal loans to your advantage

1. Borrow only for needs, not wants

There is no free loan in the world and every loan comes with a price comprising interest, fees and charges. The only exceptions are loans kindly extended to you by your loved ones or close friends.

Bearing that in mind, this is why you should only borrow for your needs, not wants such as luxury bags, pricey aesthetic procedures, designer apparels etc. 

If you’re in a position where you desperately need to borrow cash to tide over something truly unexpected and urgent, make sure you borrow only what you need and are able to repay your monthly instalments punctually throughout your loan tenure.

As cliche as it may be, it is important that you make the distinction between needs and wants to avoid getting mired in unnecessary debt.

2. Compare personal loans to find the best one that suits your needs

So many banks, financial institutions and licensed moneylenders offer personal loans. It pays to compare personal loans to find the best one that suits your needs.

Scrutinise the interest rates charged and factor in the processing fees (if any) to get a better idea of what the effective interest rate (EIR) actually is payable on the loan you are looking to take out. 

Keep an eye out for deals and promotions while you are at it. For instance, some banks offer perks like instant approval and loan disbursal, annual fee waivers for their credit cards or even cashback on your first month’s instalment.

ALSO READ: Personal loans during tough times - 5 purposes you should never use them for

3. Be very clear on your repayment plan

Know the terms and conditions of your loan well, in addition to making your monthly instalment payment punctually.

An early repayment fee ranging from $100 to $250 (or a certain per cent of the outstanding principal, whichever is higher) may kick in should you cancel your loan or pay up your loan in entirety before the loan tenure is up.

This fee varies depending on the bank or financial institution you’ve taken out your personal loan with.  

This article was first published in SingSaver.com.sg.