Personal Loans

A Basic Guide to Personal Loans

Unlike mortgages, personal loans are “unsecured” loans that are not backed by a collateral like your house. This means that the lender cannot directly seize your assets when you fail to pay back the money you borrowed. In contrast, you get a “secured” loan when you get a mortgage or auto loan to buy a house or a car. In these cases, the lender can take your home or car away when you fail to make good on your debt. Still, “unsecured” does not mean it is a free lunch. First, personal loans charge a higher interest rate than secured loans like mortgages. Secondly, there are no consequences for not paying your money back. When you default on your personal loans, your credit score will still be damaged, which will impact your ability to get credit cards or other loans in the future.

Table of Contents

Pros of Personal LoansCons of Personal Loans
  • Fast Availability: Most personal loans in Singapore can be made available to you within a week of your application, if not the same day. This is a crucial feature for those who might need to borrow for an emergency.
  • High Interest Rate: Personal loans charge higher rates than secured loans and also higher rates than some credit cards. In a sense, this really should be your last resort.
  • Unsecured: There are no collaterals, so the consequence of not paying off your debt is not as severe as failing to pay your mortgage back.
  • If you have excellent credit, you may be able to find other ways of borrowing money at lower rates, like home equity loans. But you should be careful as you will be putting your house up as a collateral.
  • Fixed Interest Rates: Because interest rates on personal loans are fixed, they might be safer than credit cards, whose interest rates can go up as your balance continues to increase.

Why You Might Need a Personal Loan

In Singapore, an unsecured personal loan can be a great way for you to get a relatively large sum of cash you might suddenly need. While we do not recommend using a long-term financing to fund your short-term needs, a personal loan is still a better method than credit card debt if you desperately need cash now. One can think of a countless number of examples where you might face a financial emergency. Maybe you suddenly need a costly medical treatment that you don’t have the cash to pay for. Maybe you need to make a down payment for a wedding. Regardless of what it is, if you don’t have access to a big sum of cash you need right away, personal loans can be a decent method of solving your problem in the short term. If you are looking for a personal loan, you can check out our analysis on the best personal loans in Singapore.

There is also a special type of personal loan designed for students who might need help with their education expenses, like school text books or even tuition. Obviously, you have to be an enrolled student to qualify for this type of loan, but if you do qualify it’s a great way to finance your education because banks offer a special low interest rates around 5-6% for students, roughly 30-50% lower than what is usually charged for personal loans.

It can also be used to consolidate your debt into one manageable account where you pay a fixed amount monthly at a more affordable rate. But interest rates and other terms can vary greatly based on your annual income and other factors. You can learn more about the average costs of personal loans in our guide.

Here are some examples of situations that may require you to get a personal loan:

  • Family Emergency
  • Medical Emergency
  • Wedding
  • Vacation or Honeymoon
  • Pay Off Credit Cards
  • Debt Consolidation
  • Education Expenses: College Tuition or School Books

How Personal Loans Work

When you take out a personal loan, you receive a lump sum of money that you need to repay over a set period of time. Most personal loans also come with fixed interest rates and repayment periods. This means that, unlike a credit card debt, you need to repay your personal loan by making a series of predetermined monthly repayment for a few years. Most personal loans are also fully amortized, meaning their monthly repayments consists of interest charges and principal repayment. Amortized loans are easier to budget for as there are no balloon payments at the end of the loan term. In the table below, we demonstrate how a personal loan of S$10,000 over 3 years could pan out in terms its different components.

Example loanDetails
Loan Amount$10,000
Flat Interest Rates4.8%
Loan Terms3 years
Total Monthly PaymentS$317.78
Monthly Principal RepaymentS$277.78
Monthly Interest PaymentS$40

What You Need to Apply for A Personal Loan

In Singapore, you need to be between 21 and 65 years old to qualify for a personal loan. If you are in this range, any reputable lender will ask for your annual income. Most banks will require you to make at least S$30,000 in annual income, although some offer personal loans to people who make less than S$30,000 at a higher interest rates. If you are a foreigner, this annual income requirement will increase to $40,000 to S$60,000 depending on the lender.

In terms of documents, you will likely need to provide the following to the lender to be approved:

  • Proof of Identity: Singapore Identification Card (IC) or Employment Pass (EP) + Passport
  • Proof of Address: Documents including your residential address (i.e. utility bills with your name and address)
  • Proof of Income: Your Latest 12 months’ Central Provident Fund (CPF) contribution history statement or Latest Income Tax Notice of Assessment or Latest Computerised Payslip or Salary Crediting into the lender’s bank account

Types of Personal Loans Available in Singapore

In Singapore, there are three main types of personal loans available to consumers via bank lenders.

  • First is personal installment loan. These loans provide a lump sum of cash at upfront, which you are supposed to payback on a monthly basis over time. This is the most common form of personal loans that can be used to pay for emergencies or even weddings.
  • Second type is called credit line. Credit line is a “revolver” from which you can draw money whenever you want. Usually, the lender decides how much you can borrow from your line of credit at any given time. You only pay interest on the amount and the duration that you have borrowed. Once you pay it back, you are not obliged to pay anything until you decide to borrow cash from your lender again.
  • Third type is called balance transfer. This particular type of loan allows you to transfer any outstanding loans you already have into one place. Some lenders will even give you a grace period (usually 6 to 12 months long), during which you are charged no interest. Balance transfer loans are a great way to consolidate your debt into a more manageable account with fixed monthly payment that you can budget.

Before you take out a personal loan, you should always consider if this is the right option for you. Although they are better than credit card debt, personal loans still come at a relatively high price. Therefore, here are some parting thoughts and advices for those who are considering getting one of these.

  • Be sure you can pay it back before you borrow. Defaulting on a personal loan can really hurt your credit score, which can have significant consequences down the road. Borrow for a wedding or a vacation if you are confident you can make the payments.
  • Check out other options like borrowing from your family or friends. Or, if you have good credit and an existing banking relationship, you can check to see if there are better alternatives at your local bank or credit union.
  • Borrow to consolidate debt. If you need a fixed monthly payment at an affordable rate to help you manage and pay down your debt, personal loans can help you get out of debt more quickly.
  • Once you decide a personal loan is a good choice for you, know what you have to pay every month and manage your monthly budget to make good on your payments. Personal loans often come with a fixed, regular monthly payments, so you’ll have an idea of what to expect as you manage your budget.

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