Everything You Need To Know About Personal Loans in Singapore - GoBear's Ultimate Guide
We look at the rules and regulations regarding personal loans in Singapore, and who might be eligible to borrow money.
Money troubles are something that most of us have to deal with in life at some point or another. And no matter how financially prudent you are, sometimes life can throw you a curveball and you find yourself urgently needing money to tide over a problem. For this reason, many people turn to a financial institution for a personal loan.
There are many things to know about taking out a personal loan in Singapore, such as the maximum amount you can borrow based on your salary, and the repayment terms, so here is a guide to everything you need to know about personal loans to make an informed choice.
What is a personal loan?
Personal loans are small unsecured loans that allow you to borrow a sum of money without having to put up collateral like your house or car. Personal loans can be a fast way to get access to money.
A secured loan is a loan that requires you to pledge an asset, such as your home or your car, as collateral for the loan. Mortgages and car loans are two types of secured loans.
Conversely, an unsecured loan is not tied to any of your assets, so interest rates tend to be higher since the bank can’t seize your personal belongings when you default on payment. Personal loans are examples of unsecured loans.
To be approved for an unsecured loan, you typically need to have a good credit history and a steady income. Loan amounts may be smaller since the lender doesn't have any collateral to seize if you default on payments.
Types of loans you can apply for
There are several kinds of loans that can be technically considered personal loans in Singapore:
1. Personal term loan
Under this type of loan, you borrow a specific sum of money from a bank and then every month, you pay back a fixed amount, which is your loan repayment plus interest. You can choose to pay it over a specific period of time, which could be anything from one year to seven years. When the term “personal loan” is used, it largely refers to this kind of personal term loan.
2. Line of Credit
This kind of loan goes by several names, such as credit line, revolving loan, cash line or flexible repayment loan. This is when the bank agrees to set aside a pre-approved amount of money for you to draw on when you need it. You can withdraw the entire amount or just part of it, and you pay interest on only what you withdraw.
Payment-wise, unlike term loans, there is no fixed repayment period. You repay as quickly as you want whenever you have the money, and if you’re unable to pay back the full sum, you can repay a bank-stipulated minimum amount of money every month, and roll your remaining debt over.
But note that the more money you owe and roll over, the more interest you pay. On top of that, the interest charged for this kind of loan is very high, so use this only as a last resort.
3. Balance transfer
A balance transfer is a kind of loan which is used to manage credit card debt. Also known as fund transfer or a short-term funds transfer facility, a balance transfer allows you to move your existing credit card debt from one card issuer onto a new credit card, which charges 0% interest for a stipulated amount of time, usually six months or 12 months.
It is kind of like using a new credit card to pay off the debts from your old credit card, except the new credit card charges you 0% interest. The aim of a balance transfer is to help you reduce the amount of interest you’re charged as you pay off your debt.
Balance transfer works if you have a solid repayment plan and are confident you can pay off your debt before the 0% interest period runs out, because after that, high interest rates will kick in, which might bring you back to square one.
You will also have to pay a processing fee on the approved transfer amount.
4. Debt consolidation loan
If you owe money to multiple banks and financial institutions, you might want to consider taking a debt consolidation loan. When you take out such a loan from a bank, the bank will pay off your multiple debtors, and you will owe money to just that one bank. This is an option that allows you to manage your outgoing expenditure better by leaving you with just one repayment to worry about. It also means you don’t have to deal with multiple fees and interest rates from the different banks you owe money to.
It could also work out if the bank offering the debt consolidation loan has lower interest charges than the other banks you owe money to.
Debts that can be consolidated under a debt consolidation loan include personal loans and credit card debts. It cannot be used to repay debts such as renovation loans, education loan and medical loans.
Debt consolidation loans are strictly regulated in Singapore and you need to owe at least 12 times your monthly salary before you qualify for a debt consolidation loan.
When should you take out a personal loan?
When considering whether you should take out a personal loan compared to other types of credit facilities, you must consider the interest charges and processing fees. It might be tempting to borrow money to take yourself shopping or to pay for a holiday, but if there are other types of credit you can apply for, such as credit cards, you should consider these too. Personal loans are usually the best option in a financial emergency where you need money quickly as personal loans are usually processed more quickly than credit cards, for example.
Here are some examples of genuine circumstances when you might want to get a personal loan.
• Medical emergency
Life is uncertain, and there’s no way you can tell when you or your loved one is going to require emergency medical care that could require a large sum of money. This could include the costs of dental work, which can be high.
• Family emergency
Family emergencies such as an unexpected death could mean hefty funeral expenses which need to be covered with little or short notice. Personal loans are thus a good option for expenses incurred during a family emergency.
• Vehicle repair
If your car, motorcycle or truck has broken down and you rely on it to make a living or to get to work, a personal loan can help cover the costs of repair.
• Educational expenses
If your laptop suddenly breaks down and you need to buy a new one for educational coursework, or you are required to buy expensive textbooks, a personal loan can be beneficial especially since getting an education can be seen as an investment in yourself.
• Credit card debts
The interest rate on credit cards is notoriously high and if you find yourself struggling with credit card repayments, you might want to take out a personal loan to pay off your credit card debt, because personal loans offer much lower interest rates. But make sure you have a proper repayment plan in mind because the last thing you want is yet another debt on your hands.
When not to take a personal loan
Conversely, below are situations when you think you should be taking out a personal loan on, but actually shouldn't.
• Weddings, honeymoons or vacations
These things are generally considered frills and you’ll be stuck paying off your debt years after the enjoyment has passed. Also, borrowing money for such things may encourage bad financial habits, since it’s better to save for such expenses than to borrow for them. Even if a wedding is a necessity, it’s better to scale back the ceremony than to take out a loan for it.
• You want to buy a car, renovate your home, buy a home or pay for your school fees
A personal loan can be used to do all the things above, but it is not ideal because the interest rates on personal loans are much higher than specific loans such as a car loan, renovation loan, home loan or education loan.
• Never take out a personal loan for a high-risk investment
You could lose all your money, then how would you pay back your loan? The only time it would be prudent and make sense to borrow money for investment is when the return on investment on the loan amount is high and the risk level of the investment is low. It is inadvisable to take a personal loan out on a high-risk investment such as to invest in the stock market or in derivatives.
• You’re struggling to repay your debts and see a personal loan as a fast fix
If you see a personal loan as a fast way to get cash to pay your other debts, but you have no proper repayment plan in mind, you are just going to dig yourself deeper into the hole. Take out a personal loan to pay your other debts only if the personal loan offers a lower interest rate than your other debts, and you already know how you are going to pay back your personal loan. Personal loans that offer a lower interest rate can be used to consolidate debt. It can also be helpful in developing financial discipline by holding you to a regular repayment schedule. While taking a loan to clear existing debt is not advisable, if it helps in consolidating your debt at a lower interest rate, it can be considered.
Things to Consider When Choosing a Personal Term Loan
It’s important to do your research when committing to a loan because each bank will offer unique features and terms to its potential customers. Here are some things you’ll want to consider when you’re choosing a personal term loan.
• Repayment period: A loan term, or tenor, is the period that you’re borrowing the money for. The longer the term, the smaller the monthly repayment – but the more interest you’ll end up paying in the long run. So don’t be too quick to lock yourself into a long repayment period. Instead, choose the shortest loan term you can manage to minimise your interest payments, but make sure that the monthly installments are within comfortable limits.
In Singapore, banks offer a term for personal loans that run from one year to about six or seven years, subject to terms and conditions. HSBC, for example, offers a tenor of up to seven years – but only for salaried workers. Otherwise, the bank will loan you for a term of only up to five years.
• Interest rate: One thing to note that the interest rates advertised by banks may not be the interest rate the banks actually charge you. POSB is currently offering rates as low as 3.88%, but the fine print says that the interest rate offered to you is based on your personal credit and income profile. It may differ from the published rate and the rate offered to other borrowers.
UOB, on the other hand, offers a flat rate of 8%, but is currently running a promotion for new customers at 4.5% (figures current as of 11 March 2019)
The interest rates offered by banks can also depend on your loan tenor.
Banks may revise their personal loan rates from time to time, especially in the face of stiff competition from the other banks, so rates will vary.
Also, take note of the fact that there is a difference between the interest rate, and the effective interest rate (EIR). The Effective Interest Rate (EIR) shows the real interest rate of your loan because it takes into account factors such as processing and other fees, as well as how long the loan tenor is. That’s because the effective interest rate also takes into account the effect of compounding.
In Singapore, financial institutions are required to state the effective interest rate next to the advertised rate so that you will know how much you are really paying.
• The maximum amount you can borrow: Most banks will loan you up to four times your monthly income if you meet their minimum income requirement, which is $20,000 a year for banks like DBS/POSB, and $30,000 a year for banks like HSBC.
If you earn more than $120,000 a year, banks will loan you eight to ten times your monthly income, depending on the bank.
Maximum loan amounts are not guaranteed however; the bank will assess personal factors such as your credit history before determining the final amount to loan you.
• Minimum loan amount: Most banks require a minimum of $1,000. HSBC requires a minimum loan of $5,000.
• Early Termination Fee: Most banks will charge if you pay off your loan before the term is up. POSB and DBS charge a $250 fee as an early settlement penalty, for example, while Standard Chartered Bank is charging $150 or 3% of the outstanding principal, whichever is higher.
• How fast you can get the cash: Most banks approve personal loans quickly. Banks such as HSBC promise instant in-principle approval online (subject to terms and conditions) and cash the next day upon submission of full documents.
• Processing fees: There will be a processing fee when taking out a personal loan. Some banks charge a flat rate, while others charge a fee that is a percentage of the amount you are borrowing. DBS, for example, charges a 1% processing fee, while HSBC charges an $88 processing fee, which is being waived under a promotion currently.
Similarly, UOB is not charging for processing fees right now.
• Promotions: Because of stiff competition from other banks, banks will sometimes hold promotions, either in the form of low-interest rates, waived processing fees or cashback rewards. Some banks may even offer supermarket vouchers from time to time.
Standard Chartered Bank, for example, is currently offering a cashback of up to $1,088 on your approved loan and an additional $50 cash back when you apply online, subject to terms and conditions.
Do you need to be an existing bank customer?
Some banks require that you be an existing customer of the bank, by either owning a bank account or holding its credit cards. OCBC, for example, requires that you be an existing OCBC Credit Card or OCBC EasiCredit Holder. POSB and DBS also require that you have an existing deposit account with them and if not, you need to apply for one, which can be done online.
Are you eligible for a personal loan in Singapore?
All banks have requirements for borrowers, such as income, age and citizenship requirements, but with their own variations.
• Income: Different banks have different minimum income requirements to extend you a loan. DBS/POSB Personal Loan, for example, require you to earn a minimum annual income of $20,000 to borrow up to four times your monthly income; and earn more than $120,000 annually to borrow up to 10 times your monthly income.
HSBC, on the other hand, requires you to earn at least $30,000 a year to qualify for a personal loan of up to four times your monthly income, and more than $120,000 year for a loan up to eight times your monthly income.
• Citizenship: Some banks such as POSB and UOB will loan money only to Singaporeans and Permanent Residents, while banks such as HSBC and Citibank will loan to foreigners, but with a higher minimum monthly income.
• Age: The borrower will need to be at least 21 years old. Some banks also cap the age limit at 60 or 65, depending on the institution.
• Employment or a steady income: You’ll need to be able to show that you have a steady income, either through a presentation of a computerised payslip or income tax statement.
Other factors that will affect whether you can get a loan
• Credit report and score
An important factor in getting your loan approved is your credit report and score. Your credit report is a record of your credit payment history compiled from different credit providers. Most lenders will check your credit file to assess your creditworthiness prior to making a decision, so a good credit repayment history will make it easier for you to obtain credit and to qualify for loans. If banks see that you have borrowed a lot or have a huge amount of credit available to you that you can borrow using credit cards and personal loans, they may be reluctant to loan you more, for fear that you won't be able to pay it all back.
A credit score is a number used by lenders as an indicator of how likely an individual is to repay his debts and the probability of going into default. It is an independent assessment of the individual's risk as a credit applicant.
Your credit score is a four-digit number based on your past payment history on your loan accounts. The score ranges from 1,000 to 2,000, where individuals scoring 1,000 have the highest likelihood of defaulting on a payment, whereas those scoring 2,000 have the lowest chance of not paying. Together with the score, the risk grade and risk grade description are provided.
Factors that affect your credit score are things how much money you owe in total; whether you have applied for too many loans too quickly; whether you’ve made any late payments or defaulted on your loans; and whether you have a history of reliably making payments.
To get a copy of your credit report, you can request a copy from the Credit Bureau Singapore. You may get a copy of your credit report for free if you recently applied for a loan, otherwise, you have pay $6.42 to get it.
To improve your credit score, it is important to manage your finances well. Pay your bills on time, make sure you don't take too many loans or credit cards, and don't borrow too much.
• Total Debt Servicing Ratio
A very important concept to understand when taking out loans is the Total Debt Servicing Ratio (TDSR). The TDSR limits the total amount of money you can borrow to 60% of your gross monthly income. This includes all your loans including personal loans, home loans, car loans and credit card balances.
TDSR is part of the government’s efforts to ensure Singaporeans do not overextend themselves financially by overborrowing. So the amount of money you can borrow under a personal loan will also depend on whether you have already taken out some other forms of loans, such as a housing loan or car loan.
Conversely, if you have already taken out a personal loan, you will find that you will not be able to borrow as much when you want to take out a housing loan or a car loan.
Where to find the best personal term loans
You could go from one bank website to another to learn about the kinds of personal term loans and the terms they are offering, or you could go to a comparison website like Gobear, which will search personal loans from nine major banks in Singapore, offer an unbiased comparison rating of the banks and also show you all the latest promotions in one place.
Looking for a personal term loan on Gobear is easy. First, click on personal loan, then enter the amount of money you wish to borrow. After that, enter the number of years you wish to take to repay your loan, and your monthly income. Also indicate whether you are a Singaporean or PR, or a foreigner.
Click on “Show my results” and the website will show you all the banks that will extend a personal term loan to you. Under the listing of each bank, you will also be shown details such as the monthly repayment, the interest rate and the effective interest rate, the total amount of interest you end up paying at the end of your tenure and the processing fee for your loan.
Click on “read more” and you will also be shown details such as how fast you can expect to get approval, when you can get the money and other important details like the maximum amount you can borrow, the late payment fee, the early repayment fee, and the documentation you require to apply for the loan.
You can also select several banks to compare the rates side by side.
Happy with the bank’s terms? Click on the “Apply via bank” green bar and you will be taken to the bank’s website to apply.
You could also look for and compare credit lines from various banks, as well as debt consolidation plans on Gobear.