Personal Loan - What You Need To Know
What is Personal Loan?
It is a type of unsecured loan also known as signature loans and helps to meet your current financial needs. You don’t need any security/collateral while availing it. Personal loan gives you the flexibility to use the funds as per your convenience and need. A personal loan has higher interest rates than secured loans like a home-equity loan, but you are not required to put up any collateral to ensure repayment.
More on Personal Loan
The main characteristic of a personal loan is that it is not secured by collateral which means you don't have to use your car or real estate to back up the loan and for this reason they are also known as unsecured loans. Unlike bank loans, an unsecured loan is not guaranteed by any type of property and are backed only by your promise to repay, these loans are bigger risks for lenders and, as such, typically have higher interest rates than secured loans.
Personal Loan or Credit Card?
Personal loans and credit cards are both types of credit provided by financial institutions. They can be for similar amounts, but personal loans are for a finite amount of time, whereas credit cards are a revolving line of credit. Personal loans are usually available for terms of between one and five years and you receive the entire loan amount at the beginning of the term. You then make ongoing payments to repay the loan in full.
Credit cards do not come with terms. You are offered a credit limit and required to make ongoing repayments to keep your account in good standing. You can continually draw up to and including that limit and spend however much you choose on your card. You need to repay a percentage of whatever you spend each month.
Credit cards are best reserved for short-term financing due to their high interest rates. Use a credit card only for purchases that you’ll be able to pay off by the due date, like daily expenses or monthly bills.If you get a 0% interest credit card, you can take your time paying off purchases. Still, you should have a plan to pay off the entire balance before the introductory 0% APR period ends, because you could get hit with interest on your remaining balance, as well as retroactive interest on your initial balance.
Personal loans are best used for longer-term financing. This could include things like expenses for starting a small business or consolidating credit card or other debt. Since personal loans typically have better interest rates than credit cards, they’re a better option if you aren’t able to pay off your balance in full monthly.
Details to watch out for with personal loans
Prepayment penalties – the lender will usually estimate how much money they can make from your interest payments using the assumption that you’ll pay interest up till a certain date. Paying off your loan early means that they will earn less from your loan so some may charge a fee for paying off the loan earlier. Such fees are called prepayment penalties or exit fees. Be sure to look for the words “no prepayment penalty” on your loan term when you apply.
Effective Interest rate(EIR)- you may come across the terms advertised and effective interest rates when you are looking for a loan. The effective interest rate is the actual interest rate you pay for using the loan and is most likely different from the headline rate. The effective interest rate is usually higher because the interest is calculated on a compound basis. If you find them confusing, just watch for the EIR to determine the cost of borrowing.
Accidental overdrafts- If you link your loan to your savings account for automatic payments, you might risk an overdraft where the account does not have enough money to service the instalments each month.
To know how to qualify and get a Singapore Personal Loan, first check the Eligibility Criteria for Personal Loan.