Personal Loans 101: Everything you need to know
The day has finally arrived. You decided that it is high time you settle down with your long-time partner of 5 years. Time to buy the best grade proposal ring that she has been dying for and plan for the big proposal day. But hold on, that is going to burn a big hole in your marriage funds. You seem short of that few thousands but you do not want to disappoint your beloved partner.
Sounds familiar to most of us? I bet it does. Help is here in the form of a personal loan. For the past couple of years, interest rates have been low and this is good news for majority of us in need of a quick short-term loan.
Personal Loan is an instalment loan that allows one to borrow a specific amount of money which comes with a fixed interest payable over a period of time. Monthly repayment amount is fixed and it can be repaid over a period of between 1 year to as long as 7 years.
Currently, effective interest rates among the top few personal loans range between 8.5% - 10.5% per annum. Before you rush into signing up for a personal loan to finance your dream, here is a short list of pointers you may want to take note of.
Types of Interest Rates
You probably have seen banks talking about Effective interest rate (EIR), Applied / Flat interest rate (AIR / FIR). Consumers are constantly baffled by these interest rates terminology.
The Applied / Flat Interest Rate is the actual rate that the bank is charging you whereas the Effective Interest Rate is the actual cost of borrowing as they factor in the applicable fees such as processing fee, annual fee etc.
What are the fees involved?
You might want to be concerned on what are the actual fees involved and how it can impact your loan payment. The common fees applicable are:
- Processing fee
- Late payment fee
- Early repayment fee which is typically a % of the outstanding principal or a fixed amount, whichever is higher;
Personal loans these days may be tied to a Line of Credit facility or Credit Card as a package for better interest rates. One should always factor in such facilities and the fees that comes with it. Additional fees like annual fee for these Line of Credit or Credit Card should be taken into your consideration.
Maximum Loan Amount and Loan Tenure
Banks always have a cap on the number of times of your monthly income based on annual income when it comes to loan quantum eligibility. Always find out the max amount you can borrow based on your annual income (In case you need more but one bank cannot fulfill your needs).
Every bank has a different maximum loan tenure typically up to 5 years while some do offer up to 7 years. Hang on, before you max out on the tenure to pay off your loan comfortably, always remember that the longer you hold the loan for, the more interest you pay! So carefully weigh the benefits of a lower monthly repayment against a higher overall cost.
Eligibility and Documentation
Now that you know what to look out for, time to find out what are the criteria to be eligible for the loan application. Find out what is the minimum income required, the age eligibility, and the minimum amount of loan you can borrow in case you do not really need a huge loan (then why not borrow from your family at 0% interest?).
In general, you should be at least 21 years old earning a minimum annual income of $20,000 to be eligible but they do come with a lower cap on amount one can borrow. A minimum annual income of $30,000 a year would get you up to 4 x your monthly income loan.
For foreigners, the annual income requirement commonly range between $40,000 to $60,000 and the maximum amount eligible is mostly much lower and come with a lower cap on the amount one can borrow.
Prepare your proof of residential address and income, which includes your NRIC / Passport / Employment Pass, Latest Computerized Payslip and Latest Income Tax Notice of Assessment. Foreigners normally need to have at least minimum 1 year validity remaining on their passes.
A quick tip: Some banks partner with online comparison sites to give better offers as opposed to applying on their website. You will be surprised at how much you could save with some of these offers. Not forgetting the promotional gifts that comes along with it.
Well, it always pays to do your own homework if you intend to take up a personal loan. Work out your comfortable budget and do not fall into a situation of incurring extra charges.