Good vs Bad Debt: How to Prioritise Which Loans to Pay in Singapore

Growing up, we were probably taught that debt is a bad thing, something to avoid at all costs.

But the truth is more nuanced than that. We are “borrowing” every time we swipe/tap our credit cards; and in Singapore, you probably can’t buy a house or a car in cold hard cash, unless you’re filthy rich.

So debt is not evil in and of itself. While all debt needs to be paid off at one point or another, the important thing is to prioritise paying off bad debt over good debt.

We teach you how to take a bird eye’s view of all your loans and how to figure out which to pay off first. Here are the most common types of debt in Singapore and the approximate interest rates charged.

Types of loans in Singapore and their interest rates

Type of loan	Interest rate	Effective Interest Rate
Borrowing from family	Possibly 0%	Possibly 0%
0% credit card installments	0%
Home loan	1.2% to 2.6%
Education loan	2.5% to 5.39%
Business loan	2.55% to 11%	5% to 13%
Car loan	2.28% to 2.99%	5% to 6%
Renovation loan	2.98% to 4.2%
Personal loan from bank	3.4% to 5.43%	5.7% to 14.7%
Credit card	25% to 30%	Crazy high

Generally, you’d want to pay off those debts from the highest interest rate to the lowest. But it is also important to understand what is good debt vs bad debt. What’s also key is understanding effective interest rates. Effective interest rates is the true cost of borrowing. Most times when you get a loan, you can expect to pay more than the advertised interest rate when you take into account the administrative fees etc.

Good debt creates an opportunity that would more than repay itself. For example, I borrow $15 million to build a condo, and then sell condo units to earn $25 million, that would have been a good debt. Other examples of good debts (if managed well) are education loans, home loans, business loans and debt consolidation plans.

Bad debt never amounts to more than a liability. For instance, I break my leg and have to borrow $500 for treatment, the best outcome is me managing to pay back that $500 (assuming an interest-free loan). Other examples include using your credit card to buy a luxury handbag that isn’t within your means and taking a car loan to buy a swanky car only to impress.

High interest debt like credit card debt should be paid off immediately. Unless you strike Toto, you probably shouldn’t be rushing to pay off your home loan in one shot.

Debt to friends and family (possibly 0%, but…)

When you have run out of cash, the first zero-interest loan you can get is probably from your friends and family members.

If it’s a one-time thing and you manage to repay on time, it might be acceptable. Unfortunately, if you don’t pay it back promptly, you risk damaging important relationships.

Also, if you let your friends and family catch you living it up, going on overseas holidays or enjoying shopping sprees when you still owe them money, and you are going to develop a reputation as the chao kuan spendthrift.

If you really have to do it, make a sincere effort to pay back the money as soon as you can. Don’t take it for granted that people close to you wouldn’t mind lending you and you can take your time to repay. Money is difficult to come by for you as well as others.

0% credit card installments (0% if you pay on time)

0% credit card installments sound like a good idea because you are not paying interest on the money you’re borrowing.

However, you might be charged processing fees of 3% to 5%, as well as risk paying late payment fees if you miss your monthly installment deadlines.

If you can avoid it, try not to rely on these for every purchase. If you turn to 0% credit card installments for everything from your wedding ring to your new laptop, washing machine or fridge, the monthly installments can really add up and affect your cashflow, which in turn can push you into debt for your other expenses.

In addition, 0% credit card installment loans also contribute to your overall debt when calculating your TDSR for home loan purposes. Taking out these kinds of loans affects your ability to qualify for a home loan.

Home loans in Singapore (~1.5% to 2.6%)

This is a necessary form of debt because ultimately you need a home to live in, and renting tends not to be a financially smart choice in Singapore due to outsized rents.

You can still be smart about taking out the best home loan in Singapore by comparison shopping before signing up for a loan, understanding the difference between home loan packages and refinancing periodically in order to keep your interest rates low.

Here are some examples of home loan packages in Singapore.

Home loan interest rates are personalised based on your property type, so it’s worthwhile to compare them before committing. You can eliminate the legwork by getting free home loan quotes and advice from the MoneySmart team.

Education loans in Singapore (2.5% to 5.39%)

There are a few types of education loans. In Singapore, you can get on the CPF Education Scheme (2.5%) which allows you to loan from your parent’s CPF to pay for 100% of your course fees.

Then, there is the MOE Tuition Loan, which charges no interest while you are studying so you can moonlight as a private tutor to earn spare cash and return your loan as you go.

If both options are not available to you, you need to take an education loan from the bank. The interest rates are higher, from 4.38% to 5.39%.

Also consider applying for scholarships and bursaries. We can’t all be PSC scholars, but many smaller organisations like clan associations do give out partial or full scholarships.

So is an education loan a good debt or a bad debt? Well, it depends on your beliefs. For some, a degree is no longer a pre-requisite for success. For others, they believe a degree gives you access to higher paying jobs, with the difference in the thousands.

Is it worth it to take an education loan for a higher pay and more opportunities in the future? If you get to earn $1,000 more than a diploma holder, you will make back the cost of your degree in about 3 years, so over the course of your career, an education loan can potentially pay yourself many times over.

Job markets do fluctuate and evolve though, so you must evaluate make this choice of whether to take out a loan for a degree yourself.

If you’re a working adult who’s thinking of embarking on further studies, consider saving up for the cost of part or all of your future school fees and living expenses if your current salary allows for it. Another option is to ask your employer to sponsor your studies if what you’re studying is relevant to your job.

Business loans in Singapore (2.55% to 11%) 

Every business needs working capital. You need money for office space, staff, marketing, etc. One of the worst things you can do is to tap into your own finances, and pay for all of it upfront. If you do, you’re about to find out the biggest business expense is optimism.

Clever use of loans ensure that even if the business fails, you’ll be paying a manageable amount every month. But if you emptied your bank account, you’ll be living on credit for months after the business fails, and you’ll struggle twice as hard to recover.

Also, the loans might empower your business to do something that will more than repay it, so it’s potentially a good type of debt to have.

Car loans in Singapore (2.28% to 2.99%)

Don’t just take the dealer’s in-house car financing scheme or the bank loan the car salesman recommends. Just like a home loan, you should be comparing loans from various banks to find the one with the lowest interest rate.

As car loan interest rates aren’t the lowest, it’s worthwhile saving up to pay for a larger portion of the cost in cash. Also avoid opting for the longest loan tenure of 7 years as that will increase the amount of interest you pay overall.

A car is often referred to as a liability, because it doesn’t increase in value. However, if you having a car means you get around more efficiently to do business, saving you precious time, it might be a good investment.

Renovation loans in Singapore  (3.2% to 4.2%)

Some basic renovations are necessary if you’re moving into a BTO flat, but some people opt for extravagant renovation packages that they can’t afford. A $100,000 renovation package for a 5-room HDB flat is, for example, definitely on the high side.

In order to cut costs, opt for a minimalist style with as few built-in components as possible. For instance, instead of getting built-in wardrobes installed, it’s cheaper to just buy one. Doing so can also save you money later on if you decide you want to get rid of it.

Renovation loan interest rates are not all that low so the best option is still to save up enough for a modest renovation so you can do up your home without borrowing any money.

However, if you really can’t afford the cash right now and the collection of keys to your new home is looming, compare renovation interest rates between banks on MoneySmart. Here are some examples:

Also, check if the bank giving you a home loan is offering preferential rates so you can have more interest savings.

Personal loans in Singapore (3.4% to 5.43%)

While personal loans are preferable to credit card debt, they are still relatively expensive loans to take out. Never take out a personal loan for optional or leisure spending.

However, the interest rates for personal loans are definitely lower than that of credit cards, so you can use a personal loan as a debt consolidation plan—a loan to end all loans.

For instance, you have an outstanding debt on three or four credit cards. Every month, those cards grow your debt at 25% per annum, which means your debt is snowballing FAST.

You can put a stop to that by using 1 personal loan at 3% to pay off all the cards at once. Then, you consistently pay back one personal loan at a much lower interest rate. The result is having more disposable income as your repay the loan and much lesser money paid in interest.

Whatever you do, don’t fall into the trap of frequently taking out personal loans at the end of the month just because your paycheck is running out. Rethink your budget and/or find ways to increase your income instead.

Credit card debt (25% to 30%)

This is one of the most expensive kinds of debt you could get into, second only to loans from illegal loansharks.

Credit card debt can spiral out of control very easily as you are being charged interest not just on the money you’ve used but also on the interest itself. Even if you make the minimum payment every month, your debt can easily spiral out of control.

So, never turn to credit card debt for discretionary spending like clothes shopping or entertainment. Even for essentials, find other ways to pay them if at all possible, even if you have to eat instant noodles for a month or beg your boss for an advance on your salary.

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