While personal loans are usually seamless to apply for and can disburse cash pretty quickly, do ensure the borrowed money is spent prudently.
Thus, always treat a personal loan as a carefully-considered financial decision.
“Good” debt vs “bad” debt
That’s not to say that all debt is bad. Some types of debt are considered “good” debt as they might benefit your financial health in the long run, such as home loans (as you’ll have an asset that enjoys capital gains, and a place to stay and raise your family in) or education loans (if this newly acquired qualification can help land you a higher-paying job or help you pivot to another industry with better growth opportunities).
Personal loans, when used with the wrong motivation in mind, could become a form of “bad” debt. Bad debt is money that you borrow to buy consumer goods or assets that may rapidly depreciate in value or are volatile. They could put you in a worse financial situation in the long run. These include (wrongly used) personal loans, car loans and credit card debt.
In the spirit of being responsible and careful, here are four questions to ask yourself before taking up a personal loan.
Q1: Prioritise “needs” not “wants”
You should only take up a personal loan when you need to, not when you simply want to.
That’s because you need to pay interest on them, and if you can’t pay the lender (bank) back, you might find yourself in a worse financial position than before.
If you urgently need money for an emergency situation like medical bills or a necessity like your child’s school fees, the grocery bill, rent or even debt consolidation, then that might be a sound reason to take up a personal loan …but do your sums first!
A side note in light of the many online love scams out there…if you are taking up a personal loan to help someone, make sure it’s real and not some online scammer. Listen to your instincts or consult a friend you trust if your judgement seems clouded.
We at MoneySmart firmly believe that one should always borrow responsibly — sometimes, it’s just better to save up for things the old-fashioned way.
Here’s an article we wrote during the pandemic (yes, when many of us were worried about our jobs and money) on five wrong ways you’re using a personal loan.
Q2: Are you getting a competitive interest rate from a reputable lender?
Personal loans are like any other product — instead of just going for the first one you see, you need to make sure you’re getting a competitive price and value-for-money.
Even a 0.1% p.a. interest rate difference can be significant. Let’s say you’re taking up a loan for $30,000. A difference of 0.1% p.a. would be equivalent to $30 a year. You can buy cai png for a week’s lunch with this.
When assessing interest rates, look at the Effective Interest Rate (EIR) rather than the vanilla interest rate. This is the true interest rate you’ll end up paying, as it includes all the other costs and fees the bank will charge.
It is also important to ensure that your personal loan is from a reputable lender that publishes transparent interest rates.
One such example is the UOB Personal Loan, which is provided by a leading local bank and offers a competitive interest rate from as low as 3.77% p.a. (6.89% EIR).
Q3: Are you financially able to repay the loan?
Take a loan only if you’re absolutely sure you are financially able to pay it back.
The current high interest rate environment unfortunately means that everything has risen in cost, be it insurance, household bills, school fees, food, groceries and so on.
Not only do you need to think of your current commitments before taking up a loan, you also have to project yourself into the future and consider commitments that may arise while you’re still repaying the loan. Don’t forget that with the current high inflation and raised GST rates, everything is likely going to cost more in future than it already does.
Do note that there are penalties if you cannot make your loan repayments on time. Don’t spend more money than you need to~
Whether you take a long-term loan tenor or short-term loan tenor depends on your financial situation and what works best for you.
A long-term loan tenor may help lower your monthly repayments, but that also means you’ll be paying more for the interest portion over the lifetime of the loan.
Conversely, if you want to take on the shortest loan tenor, overall interest will be lower compared to long-term loan tenor but you would need to ensure that you can afford the monthly repayments.
Let’s say you earn $3,500, and after deducting your monthly fixed expenses including CPF contributions, you’re left with about $800 of spare cash each month. You want to take up a $30,000 UOB Personal Loan.
If you take up a loan with a 1-year tenor with an interest rate of 3.77% p.a. (EIR 6.89% p.a.), your total interest payable would be $1,131. You’ll be paying $2,595 a month. This is well above your $800/month of spare cash.
Thus, you’d need to opt for a longer loan, such as the 60-month loan.
With this, you would receive an interest rate of 3.99% p.a. (EIR 7.40% pa). Based on the EIR, you would have to repay $35,985 altogether over the course of the 60 months, including interest, fees and charges. Your monthly repayments would be $599.75.
As you can see, in the second scenario you have some wiggle room with about $200 of spare cash each month that can be set aside as savings.
Q4: Are there bonuses or perks to sweeten the deal?
It’s always nice to have some incentive when getting a product — yes, even when it’s a personal loan. Look out for cash rebates / deals when scouting for a personal loan.
For instance, UOB has an ongoing promo offering unlimited cash rebates worth up to 2.2% of the approved Personal Loan amount. The promotion ends on 31 May 2023. (T&Cs apply).
The UOB Personal Loan enables you to get your hands on cash almost instantaneously, thanks to their instant approval and cash disbursement for online applications submitted between 8am and 9pm.
The processing fee for all loan tenors is waived.
Loan tenors with flexible repayment schemes are available from a minimum of 1 to a maximum of 5 years, all with low interest rates from 3.77% p.a. (EIR 6.89%).
The cherry on top? UOB is giving out the following bonuses to MoneySmart readers who apply for a UOB Personal Loan!
| Loan Size | Incentive(s) from MoneySmart | Bonus UOB Cashback (for 24, 36, 48 or 60-months tenors) |
| S$5,000 to S$9,999 | N/A | 1.00% of Approved Loan Amount |
| S$10,000 to S$15,000 | S$100 Cash via PayNow | 1.09% of Approved Loan Amount |
| S$15,001 to S$20,000 | S$150 Cash via PayNow | 1.09% of Approved Loan Amount |
| S$20,001 to S$30,000 | S$250 Cash via PayNow | 1.09% of Approved Loan Amount |
| S$30,001 to S$39,999 | S$300 Cash via PayNow OR Apple AirPods Pro 2nd Generation (worth S$362.35) | 1.09% of Approved Loan Amount |
| S$40,000 to S$49,999 | S$300 Cash via PayNow OR Apple AirPods Pro 2nd Generation (worth S$362.35) | 1.40% of Approved Loan Amount |
| S$50,000 to S$79,999 | S$350 Cash via PayNow OR Apple iPad 10.2-inch Wi-Fi 64GB (9th Generation) (worth S$503.65) | 1.40% of Approved Loan Amount |
| S$80,000 and above | S$350 Cash via PayNow OR Apple iPad 10.2-inch Wi-Fi 64GB (9th Generation) (worth S$503.65) | 2.20% of Approved Loan Amount |
No cap on maximum cash rebate. New-to-UOB CashPlus customers enjoy an additional S$100.
If you’ve asked yourself all of these questions and answered them truthfully, if a personal loan is the best way to go, consider the UOB Personal Loan for its competitive interest rates and attractive cash bonuses/gifts for MoneySmart readers.
Always borrow responsibly.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
This post was written in collaboration with UOB. While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best information in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.