At the time of writing, Covid-19 has infected about 20 million people worldwide and caused more than 733,000 deaths. It has impacted everyone in ways that extend beyond accepting what’s now become the new normal: mask-wearing, hand sanitising and washing and social distancing. In addition to this, there are many uncertainties with accompanying economic impacts on many businesses.
No industry has been spared and according to the Ministry of Manpower (MOM) last week, Singapore’s retrenchment rate has doubled in the second quarter of 2020 (March to June). For those who are still employed, job security is one thing to worry about, but there are a lot of people in the workforce who are undergoing pay cuts or worse, unpaid leave.
Clearly, job security and cash flow are the main financial stressors during this Covid-19 period. Thus, stretching every penny is on most of our minds and “cash is king” in these times.
Wants vs Needs
Now more than ever, we’re very aware of our wants and needs. What we need are essentials which include food, shelter, and transport to get to work or school, basically things needed for survival. Wants are items or services which are nice to have - like eating out, jewellery or the newest phone – but not necessary.
Your emergency savings are top priority at the moment so it’s time to take a hard look at your spending and cutting out anything that isn’t a necessity. This includes subscriptions such as Netflix and Spotify, not eating out or drinking, rethinking your gym membership (hello, home workouts), going on a no-buy for clothes (unless absolutely necessary), cutting out manicures and pedicures and more. You might be surprised at how much you spend on non-essentials when you do this, by the way.
Once you’ve listed down your essential spending, draw up a budget. From your income, minus your essential spending and the rest needs to be put away into your emergency savings. For those who are married, and your spouse is drawing an income as well, list down all shared spending and keep the rest as emergency savings which will come in handy especially if you have kids. In dual income households, this is the time to be very upfront about your finances, financial goals and any worries that may impact your relationship.
See more: 5 best free budgeting apps for tracking expenses
The Rise of Personal Loans
Although the government has given cash pay outs, unfortunately, it may not be enough for some. This is when they may turn to personal loans to have immediate access to cash. This could be to pay off a looming debt with high interest rates like credit card debt, perhaps there’s an unforeseen medical emergency or all your children need their own laptops for at home studying.
Before signing up for a personal loan, ask yourself why you do you need the cash. During these times, signing up for a personal loan might sound like an easy way to access cash quickly but is it worth it? Most personal loans have a tenure of at least 12 months; the banks need to benefit somehow, right? Not all personal loans are made the same so there are many things to consider. These include interest rates and loan period - which affects your total repayment amount, minimum tenure where you’ll be charged extra if you want to pay off your loan early, and maybe you don’t even need a personal loan but another type of loan – study, home, or balance transfer to pay off credit card debt.
However, there are certain things you shouldn’t get a personal loan for and these include, funding a lifestyle beyond your means like buying high-end luxury items and risky investments with no guaranteed return upon investments.
Personal loans can be a useful financial tool if you look into them in detail and understand all of its terms and conditions. The pros of taking a personal loan include a fixed repayment period, fixed interest rates, lower interest rates as compared to credit cards, and there are a wide range of configurations available.
Fixed repayment period and interest rates provide the borrower with a clear-cut understanding of how much they need to pay per month which helps when balancing their budget.
Always check the interest rates when browsing for personal loans. There will be two different interest rates shown – annual flat rate and Effective Interest Rate (EIR). Use the EIR when comparing different offers from banks because it includes compounding periods and application fees. However, don’t discount the annual flat rate because that’s how you calculate the amount you need to repay the bank every month. If in doubt, call the bank and ask them to explain both these interest rates to you and how it will impact your loan repayment.
There are personal loans that advertise 0% interest rates which honestly sounds too good to be true and they are. A processing fee is usually charged and deducted from the approved loan which can range between 2-3% of the loan amount. Always be on the lookout for extra charges on change in tenure, late payment fees, cancellation fees as well as the early redemption fee if you decide to pay off your loan earlier.
Explore other loans which suit your needs
Before you sign on that dotted line, there are alternative loans to consider as well, like car loans, education loans, renovation loans and more which could suit your needs and budget better. These could have more competitive interest rates, tenures and more. Additionally, if debt repayment is your priority, perhaps look into debt consolidation plans available at most major financial providers in Singapore.
Make sure you’re absolutely certain on the reason why you want to get a personal loan. Always shop around and look for the lowest interest rates or find one which you know you can pay back and fits into your monthly budget.