Things you need to know before taking a personal loan

Last Updated: Fri, Mar 30, 2018 17:22 hrs
Income Tax (Reuters image)

Are you a little cash-strapped? Instead of fretting over the situation, you might as well look at the possibility of taking a personal loan. Personal loans are great when cashflow is dry or when you're faced with a financial emergency.

In Singapore, you have some very good options to choose from. However, before you dive for your keyboard and fill out an application, you need to know certain things that will help you pick out the most appropriate loan to meet your personal expenses.

Points to Consider:



Interest rates: Interest rates for personal loans are usually higher than secured loans like home loans, home renovation loans, and motor loans among other similar loans. But, first you need to know that the advertised rate is probably just the APR (annual percentage rate). You'll get a better idea of the actual cost of borrowing this loan from EIR (effective interest rate), which takes other administrative charges and documentation charges also into account.

In Singapore, while the APR may be anywhere between 3% p.a. and 4% p.a., the EIR is usually higher between 7% p.a. and 15% p.a. It is also compounded on an annual basis and continues to accrue interest till you repay the outstanding balance in full.

Eligibility: Before applying for a loan, you need to know the conditions that you'll have to fulfil in order to be a successful applicant. If your application gets rejected, your credit score may be negatively impacted. Most lenders set a minimum eligibility criteria on age and income. The eligibility criteria may also differ depending on your nationality.


Supporting documents: Don't forget to check the supporting documents that you'll have to furnish with your application. You'll need to provide proof of your income, citizenship, and address, among other things. Foreigners may have to provide copies of their passport and employment pass.

Promotional offers: Many lenders offer discounted interest rates, processing fee waiver, and more for a limited period. Before signing up, have a fair idea of your liability/obligation during the promotional period and after it. The monthly instalment payments may vary significantly during the two phases.

Flexibility: When you take a personal loan, you'll have to enquire specifically about premature redemption fee, if any, grace period, if any, and other flexible features that allow you to make adjustments in case there is a sudden fluctuation in your monthly income or some other emergency that forces you to default.

Tenure: It is always better to opt for loans with lower tenures whenever possible. If you can pay off a loan within three years, try to do that instead of choosing the 7-year tenure that would increase your interest payments substantially.

Quantum of loan: Don't take a higher amount just because you're eligible for it. Remember that you'll have to pay back a lot more than you have actually borrowed. Explore alternative options of funding, if required. Taking a loan which you can't afford to pay back will surely have a negative effect on your credit score.

Credit history and score: Don't forget to check your payment history and current credit score before applying for a loan. If your score is good, you would probably be eligible for most loans of your choice. However, if it isn't that great, you should tread with caution. You can consult a financial expert to check your best options. Alternatively, you can click here to check the best personal loans.

There are several occasions where personal loans can be of great advantage. Not just for unexpected financial needs that life throws at you, but also for processes like debt consolidation on your credit card bills.

However, before you take any form of loan, remember to make a special allocation in your monthly budget for your emergency fund. Make sure that you're in a position to take care of your needs and emergencies. If your income becomes unstable, you can use this fund to pay down the loan instalments.