Personal Loans 101: Everything you need to know (updated with GoBearTV episode 17)
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 thousand but you do not want to disappoint your beloved partner.
Sounds familiar to most of us? The problem isn't just isolated to a proposal. At times, unexpected expenses might derail your plans and you need that bit of nudge to help you tide through that period.
Help is here in the form of a personal loan, allowing you 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, we've summarised everything you need to know about personal loans in our latest GoBearTV and a 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 fees such as processing fee, annual fee etc.
What are the fees involved?
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
Your loan amount is dependent on a few factors, one of which is your annual income. From there, banks will determine what's the upper limit that you can borrow, often using a multiplier of your monthly income as a gauge.
Every bank has a different maximum loan tenure. This typically runs up to 5 years while some do offer up to 7 years.
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, it's 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 loan you can borrow in case you do not really need a huge loan.
In general, you should be at least 21 years old and earning a minimum annual income of $20,000 to be eligible. For example, a minimum annual income of $30,000 a year would get you up to 4x 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 comes 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.
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.