Getting thousands of dollars as a loan these days has become as easy as booking a car—all you have to do is submit a few documents, meet a few criteria, and your bank will begin the process immediately. However, while getting a loan is easier, it may not be for everyone. So, before you take a loan, you need to consider a few things to keep your finances safe and secure, which are as follows.
One of the first things you must consider before taking a loan, whether it is a car loan or a home loan or a personal loan, is the interest rate you’ll be paying on it. While the interest rate may not sound a lot at first, it can quickly compound into a large amount, especially if you ignore the fine print. So, compare various loans and see which ones are offering the lowest interest rate. Ideally, the interest rate should be around 4% on most loans.
Total Cost of the Loan
Let’s say you are taking a loan of S$10,000 for a tenure of one year with an interest rate of 5%, and you’d be right to assume that the total loan amount, including interest, would be S$10,500. However, this may not always be the case. Various banks charge additional fees, like processing fees or administrative fees, that you need to account for. Look out for these fees when you are applying for a loan, and make sure the fees don’t exceed a few percentages of the total loan amount. Plus, avoid loans whose late fees exceed 4% or S$60 per month.
Next, you need to consider the amount of time you have for the loan. You need to strike the right balance between the affordability of the loan with the shortest time possible. This is because if the loan amount is too low while the tenure is too long, you’ll end up paying a lot of money in interest; on the other hand, if the tenure is short and the loan amount is huge, you’ll be dealing with very high monthly payments that may be hard to cope with. So, find the balance that you are comfortable with.
You may consider a hundred different things when applying for the loan, but these considerations are of no use if you overlook the eligibility criteria. When applying for a loan, whether at a bank or a moneylender, you need to ensure that you are eligible for that particular loan. For most loans in Singapore, you need to be over 21, earn at least S$30,000 per year, and have a decent credit rating.
However, the criteria vary from bank to bank. Some lenders may be willing to loan you money if you have a lower income but a great credit score or a high income but a low credit score. Find a loan you are eligible for, and then apply. Remember, simply applying for loans may knock down some of your credit scores if the bank decides to do a hard credit check before rejecting your application.
If you are taking a loan from Accredited Banks, you don’t really have to worry about dependability. But for other small-scale moneylenders, you need to do a thorough background check to make sure they are licensed and legitimate. Loan scams are on the rise in Singapore.
Apart from checking their dependability, make sure the bank, or licensed moneylender Singapore is fully transparent with all the fees and terms and conditions, so you don’t end up paying for more than what you expected. Plus, make sure the moneylender has the right set of guidelines in place in case you fail to repay the loan since there have been many cases of harassment for nonpayment of loans.
Its Effect on Your Credit Limit
Are you surprised? Loans can indeed affect your credit limit, but only in a few cases, especially if you are taking a loan from the same bank that provided you with a credit card. Here, the credit limit may be reduced by the bank to accommodate some of the loan amounts. However, don’t worry, this is not a bad thing. It only helps you manage your expenses and limit the amount of money you borrow from the bank.
While you don’t have to worry about your credit limit being reduced, you should worry about your credit score. To keep your credit score intact, repay the loan on time and avoid any kind of late payments.
Perhaps the most important factor to consider when taking a loan is its affordability. Sure, you may be able to buy a Mercedes on loan at the moment, but are you sure you can afford the money payments on it? Ideally, your monthly payment should not exceed more than 15% to 20% of your monthly income. Your personal loan needs to be affordable because if it isn’t, you may start missing payments, build upon outstanding debt, and quickly fall into a debt cycle that can be difficult to get out of.
The bottom line is, taking a loan from a bank or a licensed money lender need not be so easy. Make it a little difficult for yourself, and consider these things before applying for a loan. In the long run, these things are what will protect you from defaulting on your payments or falling into a debt cycle. Stay tuned to know more about loans and personal finance in Singapore.