There are two times in Singapore when the cost of living gets high. According to expert financial analyses, those times are “today” and “tomorrow”. And now the sheer number of borrowers makes sense. Well, I’m still not a fan of taking loans; but since debt and Singapore go together like puke and happy hour, you’d best be prepared:
1. Never Before a Major Loan
Never take personal loans two to three months before another major loan. In other words, no personal loans if you’re intending to buy a car, house, etc. The exception is a HDB loan (explained below).
When you take a bank loan for a car or house, a key factor is your DSR (Debt Servicing Ratio). This measures what percentage of your income can go into repaying the housing or car loan, including other overheads (e.g. repayment for other personal loans).
So the current total DSR of 55% means your loan repayments, plus repayments of any other loans you have, can’t exceed 55% of your income.
So the more personal loans you pile on, the smaller the housing or car loan you’ll qualify for. If you stack personal loans like you’re setting up a Jenga game, you might qualify for nothing.
Just for reference, most banks allow 40% DSR for a housing loan, and 30% DSR for a car loan.
If you absolutely must take a personal loan before a housing or car loan (say to cover the down payment), the timing gets tricky. Mortgage specialist from MoneySmart can help you find out what’s the best home loan in Singapore to help you out.
The HDB Loan Exception
HDB loans are a breed apart. These have a 30% MSR (Mortgage Servicing Ratio) cap.
That means your HDB loan repayments can’t exceed 30% of your income, without taking into consideration other loan repayments. So your personal loans won’t impact a HDB loan as much as a bank loan.
2. The More Specific the Loan, the Cheaper It Gets
Banks and their money are like men and their…hands. They like to know what they’re putting them into.
Hey, for all the bank knows, you’re taking their money to fund a new crack habit or something. And come collection time, they’ll be struggling to do it from the other side of your cell bars. Heaven knows they do that often enough with their investment bankers.
So when it comes to getting loans, be as specific as you can. Don’t take a personal loan to renovate your house, not when there’s a renovation loan package. Don’t take a personal loan to pay for your education, when there’s an education loan package.
In order to encourage you, specific loan packages often have lower interest rates. Personal loans tend to charge interest of about 3% to 7%, whereas specific loans (renovation loans, education loans, etc) have rates as low as 0% (usually comes with higher processing fees). Ask the banker to match a package to your needs.
Consider it a discount, for giving the bank peace of mind.
3. Shop And Compare Extensively
Personal loan interest rates can change faster than a 13 year old’s mood. They yo-yo, and you want to shop for the best at the time you need a loan.
So just because Aunt Sue got the best loan from Bank X three months ago, that doesn’t mean you should go to the same bank. Nor should you immediately go to your current bank. Expecting loyalty rewards from a bank is like expecting affection from a piranha.
See, banks make money from charging interest. So when no one’s borrowing from them, they get a bit desperate. They lower interest rates, give more lenient repayment terms, give out free luggage, etc.
So as a borrower, you want to find the bank that’s low on clients at the time. Think of it as a reverse “employee of the month”. You want to be served by the reject, not the star, because they’re so desperate they might give you better rates. Or better rewards.
4. Check the Penalties
Almost nobody checks late payment penalties, because almost nobody intends to pay late. But it’s part of knowing what you’re getting into; like checking the interest rates, or checking for a better offer.
Like credit cards, it’s not impossible to get an “interest adjustment” for just one late payment. Mess up once, and your 8% interest might become 9% – 10% from then on. Late fees can also be substantial. Besides interest, fees and probably children’s souls are another source of a bank’s income. So don’t assume it’ll be the same as a $50 credit card late fee; the penalty might be much steeper.
When two banks are offering about the same rates, penalties can be the deciding factor. So pick the lowest interest rates first. And in case of a tie, pick the bank with more relaxed penalties.
5. Personal Loans are for Cash Flow, Not Leverage
Most personal loans are unsecured. As in, there’s no collateral behind them. And since the issuing banks have no security, they’ll compensate by jacking up interest rates.
That means you should never take a personal loan without knowledge of exactly when and how you’ll pay it back. Otherwise, the interest is so high your grandchildren will be wearing slave collars. Avoid using a personal loans as leverage, or as capital for a high-risk investment.
Don’t use personal loans as alternative business loans. Don’t use them to trade on Forex. Don’t use them to buy high risk equities. You should only take a personal loan to ease cash flow issues, not to fuel “Get Rich Quick” schemes. If you need some assistance on getting a personal loan, check out our Personal Loans recommendations over at MoneySmart!