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Understanding Personal Loans in Singapore


Lending companies and banks provide personal loans to help those who need assistance with funds for easing into investments, consolidating debt or financing car repairs. It could also be used for personal needs like wedding, buying a car or paying bills.

For renovation or education purposes, more specialised loan products are designed to suit these needs. As not all personal loan lenders are the same, one must evaluate what they offer and how they differ before making the right selection. Be it the terms, interest rate or fees, these should be taken into equal consideration.



What is the difference between secured and unsecured loans?


When applying for a personal loan, you need to decide whether between secured or unsecured one. Borrowing money from a secured loan requires a piece of collateral which may be in the form of a home or a car. In such agreement, the lender automatically takes possession of these valuables once you failed to pay according to agreement. Mortgage and car loans fall under this category.

On the other hand, unsecured loan does not require collaterals but usually comes with higher interest rates. Student loans, credit cards and personal loans, in general, are considered unsecured loans.

Because of the collateral, secured loans offer faster application and easier approval. People who have bad credit history are advised to choose secured loans to guarantee payment of the money borrowed. In terms of savings, the low interest rates from a secured loan make it a better choice for those in money management woes.



Who can apply for a personal loan?


Singaporean Citizens


Most loans in the country are offered to Singaporean citizens, typically between 21 and 70 years old. Some institutions also allow foreigners from certain countries to apply for bank personal loans.

An applicant also needs to file documents that prove his residence and identity, or government-issued IDs and clearances. In addition, proof of employment and employer details, financing requirements, your NRIC copy, the CPF statements submitted over the past 12 months and your latest original computerised payslip are needed. These details determine the maximum amount of money you can borrow. Banks also want their personal loan clients to have landline phones at home or in the office for verification purposes

Foreigners


Any foreigner in the country should have a minimum income of $42,000. You should be able to present a photocopy of your Passport, Employment Pass, original payslip and Latest Income Tax Notice of Assessment.


What are the different types of Personal Loans?


Any loan in Singapore is placed among the category of term loans because they come with a set period and fixed monthly installment payments. If you are borrowing a term loan, you must repay the money you owe by the end of the loan period.

Several banks may have term-loan programmes that can support small businesses with the cash they need to operate on. Smaller businesses may use the term loan to purchase fixed assets such as equipment for its production process.

However, some packages are designated as revolving loans in which a borrower can use his credit up to a set limit whenever he needs it. You can pay only the interest so long as the line is drawn and after you pay off the amount drawn, the credit becomes readily available to be drawn once again. Interest rates charged are usually higher than that of a term loan and the interest rate type can be fixed or variable.

Here are a few types of personal loans you can apply for:

Short Term Loan – This is perfect for those small businesses having some issues with cash flow. Short term loans are seamless solutions for them to get back on track. A lot of people opt for this because it is flexible and easy and credit history checking is loose.

Cash Advance Loan – This is quite like payday loans which means you borrow a certain sum of money before they receive their monthly salaries. You may want to think twice before applying for this type since it usually comes with higher interest rates.

Business Loan – This kind of personal loan has no definite interest rate as it depends on the qualification of the borrower. Usually, funds are given to businesses, groups of individuals or organisations to be paid with specific interest at a scheduled date. Accessible and convenient, business loans are used to solve issues on cash flow within a business.

Payday Loan – Any individual can take advantage of this borrowing scheme that comes with small amount of money but high interest rate. This can be used to resolve urgent financial needs and can be paid within thirty days or during your next payday.

Education Loan – Also called student loan, this is specifically made to help students pay for their school fees and tuition. It can also be used to afford living expenses and other school requirements like books.

Renovation Loan – You might need to make immediate improvements in your kitchen and your money may not be available yet. You can check for renovation loan offers to fund repair, redecoration or enhancement of your homes. Often, this type of loan comes with huge credit ceiling and borrowers can choose different terms of payment.

Vacation Loan – You don’t have to worry in funding your next travel as vacation loans are offered by banks to finance your dream trip. What makes this more awesome is that you can start paying back after you return from the trip.



Personal loan interest rates and other fees


Once you sign up for personal, you need to be aware of the interest rates that come with that debt. Most banks in Singapore peg the annual add-on interest rate at 4.5% to 8.3%. That percentage changes depending on the amount you borrow and the time it takes you to pay the borrowed money back.

Aside from personal loan interest rates, there are other loan-related fees you need to look out for. These fees include the disbursement fee (applies for every time you cash out money on your loan), the pre-payment and late payment fees (applies when you pay your debt before or past the due date scheduled on your loan terms), transactions in foreign currency (the exchange rates used to convert these transactions into local currency may vary day to day and book to book), finance charges for interest rates (if an outstanding balance is not fully or partially paid by the due date, interest will be charged on your amount owed) and the loan modification fee (applies when you want to change some details of your loan).



What to look out for when applying for a personal loan?


Finding the best personal loan deal is easy if you understand what kind of financial agreement you are getting into. You should take not of the considerations below to make sure that your next financial obligation will resolve your cash flow woes and not the other way around.

What type of lender is offering the loan? – Moneylenders, credit unions, banks and other types of finance companies can provide you with immediate funds. However, lenders differ in terms and interest rates. Credit unions don’t require strict screening for borrowers while banks implement a more stringent screening process. These two also offer lower rates of interest as compared to pawnshops and moneylenders.

What is the APR and interest rate? – APR or Annual Percentage Rate and interest rate depend on your credit profile as a borrower. If you have good credit scores, then lenders charge lower rates. Traditional forms of personal loans are installment based which reduces the principal amount borrowed each time you pay until the entire credit is repaid in full. When applying, compare the advertised interest rate against the effective interest rate.

Why is Credit Score necessary? – Credit scores are important for lenders to assess your capacity to pay. Banks and credit unions go beyond the score as they also evaluate your entire credit history and profile. If your score is low, you might be entitled to apply for secured loans. Monitoring your credit health and regularly paying for your loans will ensure a better loan opportunity for you in the future.

What is the loan repayment period? – Repayment periods are measured in terms of weeks, number of days, months or even in several years. Different kinds of personal loans also vary in terms of debt duration. Check how long you can pay for the full amount of borrowed money depending on your capacity and convenience.

Is the loan bundled with another facility? – Some banks and other forms of lenders offer accompanying facility on your personal loan especially if you have an impressive credit profile. You may get personal loans bundled with secured overdraft or car financing. Depending on your need, check for the benefits each bundle offers before signing your loan contract.

Finding the best personal loan deal is easy if you understand what kind of financial agreement you are getting into.

You should consider the following ideas below to make sure that your next financial obligation will resolve your cash flow woes and not the other way around.



Are there fees and charges involved?


Borrowing money doesn’t come free. Processing your loan involves a certain amount of fee to be deducted upon receipt of the money. Some lenders even include the first repayment and interest amount on the initial deduction. It helps to know what fees are involved with the application so you can manage your money accordingly.

Interest Rates


Interest rates are the charges bank imposes on your loan. Applied interest rate (AIR) refers to that flat or actual charge towards the full amount of money your borrowed in relation to the duration of the loan. On the other hand, effective interest rate (EIR) reflects the extra charges imposed on your account for loan processing and approval. EIR is the true total cost of the loan which every borrower should know about.

Other Fees

Aside from the interest rates, borrowers may also be charged with other fees including:

Early repayment fees – Lenders let you pay repayment charges in case you want to settle your date earlier than your agreed period. There are certain conditions by which these early repayment fees apply based on your loan contract.

Late repayment fee – Financial advisors have always discouraged missing any payment deadlines because lenders charge fees that will add up to your monthly obligation. Due dates are set for you to put conscious effort in repaying obligations as agreed.

Cancellation fee – Lenders allow for the cancellation of loans and use of other products if you pay the balance along with fees that go with the termination.

Processing fee – This is charged to the borrower for the processing of application for loan. The fees cover the processes including credit checks, administrative costs and property appraisals. A processing fee may be automatically deducted from the full loan amount Annual fee – This is charged to the borrower based on the average annual scheduled unpaid principal balance. Annual fees are due each month but is billed and collected on annual basis.

Loan conversion fee – You may have initially borrowed money with a floating interest and now you want to change it to fixed interest rate so a conversion fee will be charged to facilitate the process. The conversion fee is usually 2% of the loan outstanding balance.



Decoding the Personal Loan lingo


Understanding the terms used for personal loans will help you manage your opportunities well. You will be guided throughout the loan process from application to the end of your contract. It will also let you have a clearer comparison of options as banks may use these terms differently according to their own policies.

Amortization – The outstanding balance from the personal loan to make equal payment regularly. The payments include principal and interest computed together.

Annual Percentage Rate or APR – The actual interest rate paid which includes the points and base interest rate.

Annuity –Refers to the series of payments over a period of years

Assumable loan – This is a situation when a buyer assumes all outstanding payments from a previous borrower

Asset – Any valuable item owned by a person, an entity or a corporation

Appraisal – The written report from a qualified appraiser which provides an estimate of the value and condition of the property.

Borrower – A person who receives fund from a loan application with the obligation to repay it with assigned interest

Collateral – Property presented as security for loans and other forms of debts

Credit Rating – A rating given to represent a person’s financial health and profile . This establishes his willingness and ability to pay based on his past records of timely payment

Debt-to-income ratio – Lenders calculate the ratio between the borrower’s income and the highest possible amount he can borrow. In general, lenders compute the ratio by 36%

Interest – Money paid for the use of money borrowed.

Lender – A person or organization providing loans to borrowers

Loan – Amount of money that a borrower is entitled to receive from a lender

Prepayment – A privilege provided to the borrower to make payments ahead of the scheduled due date

Principal – Refers to the original balance or full loan amount which does not include the interest

Settlement – The closing of a loan agreement



What is debt consolidation


Debt consolidation is a refinancing program to help customers consolidate all unsecured debts or credit facilities usually at a lower interest rate. Debt consolidation is a scheme for customers to transfer all his debts from different lenders into one credit account.

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  • 1.What can I use personal loans for?
    A personal loan is an unsecured installment loan that you can use for pretty much whatever you want. You can use it to finance a medical emergency, a family holiday or even that new laptop you’ve been eyeing on. There are more specialised loan products available if you need to finance your renovation or education.
  • 2.Who can get a personal loan?
    To qualify for a personal loan you need to be: - A Singaporean/PR or foreigner. - Aged between 21–65. Also, you will need to earn at least - $20,000 per year if you are a Singaporean or PR. - $40,000 per year if you are a foreigner.
  • 3.What documents are required for a personal loan application?
    - Photocopy of your NRIC (both sides) - If you are a salaried employee, you’ll need your latest e-statement, or your CPF contribution history statement for the last 12 months, or your latest Income Tax Notice of Assessment. - If you are self-employed, you’ll need your latest two years of Income Tax Notice of Assessment. - For education and renovation loans, you will need to provide extra documentation for verification of the loan purpose.
  • 4.How much can you borrow with a personal loan?
    You can borrow anywhere from 2–6x your monthly income, up to a cap of $200,000.
  • 5.What is my loan tenure?
    The tenures for personal loans can range from one to seven years. Renovation loans are limited to five years and education loans can be up to 10 years. The length of the loan, or tenure in jargon, is an important determinant. The longer the tenure, the more interest you will pay.
  • 6.Are there additional bank fees with personal loans?
    Some banks charge a fixed processing fee and other banks charge up to 3% of the approved loan amount. In addition, you can also incur late payment fees or early repayment fees.
  • 7.What is the lowest personal loan interest rate?
    Banks revise their personal loan rates from time to time. Personal loan rates usually range from 4%–10% per annum. This is the flat interest rate – more importantly, is the effective interest rate, which shows the actual cost of borrowing.
  • 8.What is the effective interest rate and why is it important?
    The effective interest rate takes into account the fact that you are repaying your principal, but your total interest paid will not be reduced. Sounds complicated right?

    We’ll give you a short example here.

    Imagine you borrow $1000 for two years to buy a new mobile phone at a “flat interest rate” of 5%.
    You will be paying $87.50 per month for one year (effective interest rate of 9.10%).
    Why is the effective interest rate almost twice as high?

    Let’s look at the two different calculations:
    1. The loan balance is reduced every month.
    [(interest rate / 12) x loan amount] / {1- [(1 + interest rate / 12)](-loan tenure x 12)}

    2. The loan balance remains the same during the tenure
    [(interest rate x years) + 1] / (years x 12) x principal
  • 9.Why does GoBear exclude the effective interest rate?
    The effective interest rate is introduced by MoneySENSE to provide a clearer overview of the cost of borrowing. However, banks have some liberty in definition of effective interest rate and include or exclude certain factors to lower these rates. It is mandated by law for banks to notify you on the effective interest rate. When comparing loans of the same tenure, it is easier to look at the total payment you will be making on a loan. At GoBear we include all costs associated with the loan and break it down for you in easy categories so you can see what you are paying at a glance.
  • 10.How does GoBear break down the cost?
    When getting a loan, transparency about costs and repayments is often lacking. To provide you with a better overview, we have broken down all the costs that are associated with your loan: Monthly payment: Your monthly payment for the total duration of the loan (this includes interest payments and principal repayment. Total payment: Includes all interest paid, all principal repaid and loan servicing costs. Interest payment: All interest that you will pay during the duration of the loan. Servicing cost: All non-interest payments such as processing fee, servicing cost or annual fees. The total payment includes all cost that you will pay when taking the loan plus the repayment of the loan.

If you find these answers helpful? Check out our FAQs for other products to learn more.