Personal loan vs debt consolidation vs personal line of credit: What's the difference?
What's the difference between these terms?
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PUBLISHED ONJune 29, 2022 9:47 AMByEvan SimTan Boon Hun
Getting a loan from a financial institution can be tricky for those unfamiliar with finance in general; since there are many different jargon and products and services that serve different purposes, it can be confusing to understand which is which fully.
Aren't personal loans and cash loans the same? What is the difference between personal loans, debt consolidation loans, and personal lines of credit?
This article will go through the different types of unsecured loans and their benefits and drawbacks.
Overview between unsecured loan variants
| Types of loans | Personal loans | Cash loans | Debt consolidation loans | PLC (Personal line of credit) |
|---|---|---|---|---|
| Period | Long-term | Short-term | Long-term | Short-term |
| Interest rates (EIR) | 11 per cent to 14 per cent | 400 to 576 per cent | Six per cent to 14 per cent | 12 per cent to 30 per cent |
| Late payment fees | Yes | |||
| Max borrowing amount | Four to eight times monthly income | $35,000 | 12x monthly income | Four to eight times monthly income |
| Purpose | Personal items | Emergencies | Lower interest | Flexible payment |
| Credit check | High credit score preferred | No credit check | High credit score required | |
Secured vs unsecured loans
Before we understand the difference between personal loans, cash loans, debt consolidation loans, and personal lines of credit, we must first understand the difference between a secured loan and an unsecured loan.
Secured loans are a type of loan that requires both collateral, which is an asset (car, land, property, business assets etc.) that is tied to the loan that can be used to back up the repayment in case of a default, or a guarantor, which is a person responsible for repaying the debt if the borrower defaults.
Secured loans tend to have a lower interest rate than unsecured ones as there is collateral to back up the loan.
In contrast, unsecured loans are loans that do not require collateral and the financial institution loans the money solely based on your creditworthiness and ability to repay.
Unsecured loans tend to have a higher interest rate but are relatively more flexible in their processing and payment schemes.
There are four unsecured loans that we will talk about today: Personal loan, cash loan, debt consolidation, and personal line of credit (PLC)
Personal loan
Personal loans provide a fixed amount for a fixed tenure and monthly payment plan. Personal plans do not require any collateral since they are unsecured loans.
Therefore, you can use them to borrow money for a lump sum such as education, wedding, house renovation and even for purchasing a vehicle. You do not have to justify the purpose of taking up the loan compared to business loans.
Since personal loans are the most straightforward loans to have, they are processed extremely quickly and easily; Sometimes, loan processing takes less than 24 hours, and once there is final approval from the lender, the money will be deposited into your bank account immediately.
You can also use personal loans to improve your credit score if you repay your loans and interests on time.
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This means that banks and financial institutions will be more willing to loan you in the future, providing better terms and rates. Personal loan interest rates tend to be lower than credit card debts.
However, personal loans have a relatively higher interest rates than secure loans. The average effective interest rate for personal loans in Singapore ranges from 11 per cent to 14 per cent, despite some of the best personal loans in Singapore offering effective interest rates of around eight to 10 per cent.
Personal loans are also one of the strictest when evaluating your credit score and worthiness since you have to be confident that you can pay your loans on time. Not repaying on time can lead to consequences such as a bad credit score which can greatly impact your ability to obtain a loan in the future.
Personal loans are suited for people who can pay on time, want a fixed repayment scheme and interest rate, and want to improve their credit score.
Cash/payday loan
A cash loan, also known as a payday loan, is a type of short-term loan that tags your next paycheck to borrow money when you need it.
This means you can now borrow money for your needs and repay the loan with your subsequent wages via salary deduction. Cash loans are suitable for those who urgently need access to the funds and can pay them back with a portion of their salary.
Cash loans are typically used in emergencies, such as a car repair or medical expenses. Cash loans are easy to get and fast to receive; you also do not need an excellent credit score to apply for a cash loan.
Payday loans have an extremely high-interest rate of up to 23 per cent for two weeks, they are also meant for short-term emergencies as the interest rates grow exponentially in a short period of time.
Debt consolidation loans
Debt consolidation loans are loans that consolidate all the different loans you have gathered into one place, meaning that instead of paying multiple debts, you only need to pay once a month. It is commonly used to pay off high-interest debts such as credit card debts.
Debt consolidation is suitable for those with good credit scores, who have high-interest debts such as personal loans and credit card debts, and who want a simplified repayment plan that they can follow religiously. It is not suitable for those with little to no debt.
Debt consolidation only works on unsecured loans or loans that do not have collateral. We have provided recommendations for debt consolidation loans depending on your situation, such as loans suitable for low income and loans that offer long tenures or colossal loan amounts.
Debt consolidation loans do not allow you to pay early or late, paying either too early or too late will result in a penalty of either a fixed amount like $75, or a percentage of your outstanding balance/monthly payment, usually whichever is higher.
Personal line of credit (PLC)
Unlike a personal loan that loans you a lump sum of money upfront and requires you to pay fixed monthly payments throughout your loan term, a personal line of credit (PLC) allows you to borrow as much cash as you need at any moment and repay it on your own timeline with a variable interest rate, giving it more flexibility than personal loans.
They usually allow you to take up to four to six times your monthly salary.
The benefits of PLCs are that there is flexibility in accessing those funds; you pay interest on what you borrow of a fixed lump sum; and it allows you to reuse the cash flows, meaning that you can borrow the total amount of funds once you pay back the PLC and abide by the terms of the lending agreement.
Despite the better flexibility of PLCs, they tend to have higher interest rates (roughly 12 to 30per cent) than their personal loan counterparts due to the variability of interest rates and payment periods.
There are also additional fees associated with PLCs, such as prepayment and maintenance fees. Lastly, you need a relatively high credit score to qualify for PLCs. Untimely repayment will also result in penalties and snowballing interest rates.
Depending on your situation, we have provided recommendations for PLCs, such as loans suitable for low-income and relatively short-term PLCs. Alternatively, you can find out more about personal line of credit vs personal instalment plans.
Bank vs moneylender
There are a few places where you can get a personal loan or the other unsecured loan variants. The most popular financial institutions to borrow money are banks and moneylenders.
Banks
Banks are the most common form of a financial institution that provides many kinds of loans, including personal loans, debt consolidation, and PLCs.
HSBC
Consider this if you require a large, long-term personal loan.
Eligibility: $30,000 of annual income.
Maximum loan amount: Four times monthly salary for income $30,000 to $120,000; eight times monthly salary for income > $120,000; $200,000 maximum loan size (two times monthly salary for foreigners).
Minimum loan amount: $10,000.
Processing fee: $88, waived for online applicants.
Approval time: One minute approval, receive cash in one business day.
Promotion: New BAU promo — $100 cashback.
Analyst's review
HSBC's personal loans provides one of the best bank loans in the Singapore markets.
You can loan up to four times monthly salary if you have an income between $30,000 to $120,000; eight times monthly wage for those who earn more than $120,000; and $200,000 maximum loan size (or two times monthly salary for foreigners).
HSBC is the only bank in Singapore that provides personal loan tenures for seven years. Loans can be approved in one minute once you submit the relevant documents, and the funds can be received on the same day.
HSBC's personal loan repayment schedules
| Loan duration | Flat rate | Processing fee | EIR | Monthly instalment | Total cost |
|---|---|---|---|---|---|
| One year | 3.2 per cent | One per cent | Six per cent | $860.00 | $420 |
| Two years | 3.2 per cent | One per cent | Six per cent | $443.33 | $740 |
| Three years | 3.2 per cent | One per cent | Six per cent | $304.44 | $1,060 |
| Four years | 3.2 per cent | One per cent | Six per cent | $235.00 | $1,380 |
| Five years | 3.2 per cent | One per cent | Six per cent | $193.33 | $1,700 |
| Six years | 3.2 per cent | One per cent | Six per cent | $165.56 | $2,020 |
| Seven years | 3.2 per cent | One per cent | Six per cent | $145.71 | $2,340 |
*Assuming $10,000 loan and income of $30,000; Please note that rates above are not indicative of your customised loan offer.
Loan Matchmakers
Loan Matchmakers are financial institutions that specialise in offering a wide variety of loans from banks and moneylenders; they are not as popular as banks due to banks providing a more comprehensive array of products, but they can offer better terms for those with lower credit scores or better rates than banks.
Lendela
Consider this if you are unable to obtain a personal loan from a bank.
Eligibility: $1,600 per month.
Maximum loan amount: Six times monthly salary.
Minimum loan amount: $500
Processing fee: Varies.
Approval time: One day.
Promotion: No promotions currently offered.
Analyst's review
Lendela is an online loan brokerage platform, or loan matchmaker, that compares and matches the best rates of loans in the market for both banks and moneylenders.
They will provide tailored and personalised recommendations based on your credit history, financial needs, and financial situations, such as income.
Lendela has a low minimum income requirement ($1,200 monthly), and most applicants receive more than one same-day loan offer. In these ways, the platform is an excellent alternative for those that cannot obtain bank loans.
Conclusion
Despite the differences between the unsecured loan variants like personal loans, cash loans, debt consolidation and personal lines of credit, they all serve the same purpose of providing funds to people without collateral or assets to tie into their loans.
Click on the relevant links to find out which personal loans are the best for foreigners or those with bad credit scores.
This article was first published in ValueChampion.