Take a moment to find out what personal loans are, and learn what to do if and when you need them.
A personal loan is an unsecured loan that you can use for pretty much whatever you want. You can use it to finance a medical emergency, help pay for any extra costs on a family holiday or add that much-needed flair to your wedding.
Personal loans can also be a great way to boost your cash flow to get past a short-term financial emergency. For example, if you find yourself with credit card debt, and getting charged at least 24% interest per year, consider paying it all off with a personal loan, which has a lower interest rate.
Never take a personal loan for home renovation though. Banks offer specialised loans, like a loan for home renovation or an education loan, that often have lower interest rates or requirements than personal loans.
How much can you borrow with a Personal Loan?
You can borrow anywhere from 2-6 times your monthly income up to a maximum of $200,000. The exact amount you can borrow often depends on your credit record, and other existing credit facilities.
Do you qualify for a Personal Loan?
Singaporeans, Permanent Residents and foreigners may all apply for a personal loan, though the requirements differ for each category. If you are your annual income is less than $20,000, you’re not eligible for a personal loan.
If you’re a Singaporean or PR, you must be earning at least $20,000 per year. However, if your annual income is between $20,000 and $30,000, do note that any loan you apply for will be at a higher interest rate than Singaporeans and PRs who earn $30,000 and above.
Foreigners must be earning at least $40,000 per year to be eligible for a personal loan.
Term Loans vs. Revolving Loans
There are actually two kinds of personal loans – term loans and revolving loans.
Term loans are loans that come with a fixed period of time, as well as fixed monthly instalment payments. Because of this, the interest rates for term loans are lower, but banks may also charge a “processing fee” after approving the loan.
A revolving loan is sometimes called a personal line of credit. Like a credit card, you can use it anytime, anywhere up to your credit limit. Each month, you only need to make the minimum payment of 2.5% or $50, whichever is higher. However, because of the high level of flexibility, the interest rate for revolving loans can be 3-5 times as high as the interest rate for term loans.
Say you want to borrow $5,000. You have the option of a 1-year term loan with 5% interest per year, or a revolving loan with 20% interest per year.
If you apply for the term loan at 5% interest a year or $250, you will need to pay 12 fixed monthly payments of $437.50 each (not including any processing fees). If you geh kiang make full payment before the end of the 12 months, the bank penalises you with an “early termination fee”.
If you apply for the revolving loan at 20% interest a year, you only need to pay at least 2.5% of your loan amount or about $125 a month. However, for revolving loans, interest is charged daily. Basically, that means the faster you pay back the loan, the less interest you end up paying. At 20% interest a year, your interest comes up to about $2.74 a day. If you make full payment after two months, your total interest is less than $170. However, if you take six months to make full payment, your total interest is almost $500. And if you take a whole year before you make full payment, your total interest will be almost $1000!
How long can a personal loan last?
With such high interest rates, revolving loans should only be used as an absolute last resort, like in an emergency where you can’t use a credit card and you know you can make the repayment as soon as possible. You should definitely not be looking at long-term repayment for a revolving loan.
Term loans can range from 1 to 7 years. The longer the term, the lower your monthly payments but the more interest you incur.
How do I make sense of the Interest Rate?
Banks know you’re not stupid, but they’ll still try to confuse you with phrases like Effective Interest Rate (EIR) and Applied Interest Rate (AIR). Which one should you look at when deciding which kind of loan to choose? The Applied Interest Rate is usually just for advertisement purposes. It’s purposely low so as to attract you. So ignore it like you would a woman wearing too much makeup. You really don’t want to know what’s she’s hiding.
The Effective Interest Rate is the more important of the two, and a good bank will be upfront about what it includes. The POSB Loan Assist, for example, includes a 3% processing fee and 1% insurance fee in the EIR. The ANZ MoneyLine Term Loan includes an $80 processing fee in their EIR.
But a lower EIR should not be the sole determining factor. Most banks offer lower interest rates for longer tenures, but don’t be fooled – the amount of interest you end up paying is still higher.
If you want to borrow $10,000 for 2 years, the bank offers you an interest rate of 6% per year or $600. That’s a total of $1200 in interest you’ll be charged.
If you borrow the same amount of $10,000 for 5 years, the bank may offer you a lower interest rate of 4% a year or $400. But your total interest comes up to $2000!
How to Apply
If this is your first time applying for a personal loan, you will need to have at least the following documents:
- Photocopy of your NRIC (both sides) if you’re a Singaporean or PR. For foreigners, you need a valid passport and employment pass with at least 6 months’ validity
- Proof of income
- If you are earning a salary, you’ll need your latest e-statement, or your CPF contribution history statement for the last 12 months, or your latest Income Tax Notice of Assessment
- If you are self employed, you’ll need your latest 2 years of Income Tax Notice of Assessment
Do remember that banks will need to do the necessary checks so an application can take some time. Even banks that advertise “instant approval” are limited by the time it takes to validate and authenticate the information you provide.
What is the lowest personal loan interest rate available?
Banks revise their personal loan rates from time to time. Personal Loan rates usually range from 6%-15% per annum. However, promotional rates do exist. Citibank Ready Credit is offering a 4.83% interest rate per year, while HSBC’s Personal Loan interest rate is even lower, at 4.7% per year! Use our personal loan comparison tool to find the best personal loan rates for your needs.
Share with us your experience getting personal loans. We want to hear from you.