This article is written in collaboration with SingSaver. All views expressed in this article are the independent opinion of DollarsAndSense.sg
When you need cash, taking a personal loan may be an enticing proposition because it helps you meet urgent, short-term cash requirements. However, as many financially savvy people would know, credit can be both a boon and a bane for those who wield it.
When used correctly, a personal loan can be a lifesaver. Similar to how the Singapore government is helping SMEs survive the current COVID-19 outbreak by providing access to cheaper borrowing through the Enterprise Financing Scheme, a personal loan can help individuals tide through their current difficulties by providing cashflow during a period when it’s needed the most.
However, if you don’t use a personal loan prudently and responsibly, the repayments that you have to make (with interest) might potentially bring you more problems than the current ones you are trying to solve.
When Is The Right Time To Use A Personal Loan?
A valid reason to take up a personal loan will be to lower your interest costs from other high-interest debts you might have.
For example, if you have outstanding payments due on multiple credit cards, you would be better off taking a personal loan to pay off these debts first, since most credit cards in Singapore charge an interest rate of about 25% per annum (p.a.).
In contrast, a personal loan such as the Standard Chartered CashOne Personal Loan has an effective interest rate from about 7.63% p.a., which is less costly compared to the interest rates charged on outstanding credit card balances, which could easily be 25% p.a. or more.
Besides using a personal loan to reduce debt, you may also have unplanned emergency expenses that you need to pay for. These could include medical treatments, funeral expenses and even a pay advance if you are in between jobs and need to continue paying for daily necessities.
Reasons Not To Take A Personal Loan
You shouldn’t take a personal loan to pay for a ‘want’ that you failed to save up for. For example, if you want to buy a car or hold an extravagant wedding, you should be saving up towards it, rather than taking a personal loan to spend on these things that you didn’t adequately plan for.
Other people might reason to themselves that it’s okay to be borrowing if they are using the borrowed funds to invest. However, with an effective interest rate of 7% to 8% p.a., the interest charges you pay on your personal loan could easily exceed the returns you earn from the financial markets if you aren’t experienced with investing. Moreover, the markets tend to reward long-term investors while personal loans are only a source of short-term funding.
Personal loans should be considered as a last resort option to be used only when we have exhausted other cheaper (and legal) ways of borrowing, and urgently need cash to pay for immediate needs. It’s certainly a better option than racking up credit card debts, which will incur high-interest costs or borrowing from illegal lenders, which is not only costly, but may cause you all sorts of unnecessary problems.
Key Terms You Should Know When Taking A Personal Loan
Before taking a personal loan, it’s important first to understand how it works. Here are some details to look out for.
Advertised Interest Rates VS Effective Interest Rates: As written in a previous article, the advertised interest rates (also known as the applied rate) for a personal loan is rarely the effective interest rate (EIR) that you pay. The advertised interest rate is the interest that you pay based on the amount you borrow. The EIR takes into consideration other costs, such as processing fees and your repayment schedule.
Loan Duration: How long you expect to need the money for should be the loan duration that you should be taking – and no longer than that. For example, if you need the loan for one year, that should be the loan duration you choose. The longer your loan tenure, the higher your interest costs. Avoid paying higher interest costs than you need to by choosing a suitable loan duration.
Early Repayment & Annual Fee: There are usually charges if you decide to pay off your loan early. Before taking a loan, check what these repayment charges are. For example, the Standard Chartered CashOne Personal Loan charges an early redemption fee of $150 or 3% of your outstanding principal, whichever is higher. Personal loans may also charge an annual fee, which adds to the amount that you need to repay.
Understanding Your Loan Repayment Schedule
When taking a personal loan, it’s important to remember that every dollar you borrow needs to be repaid, with interest, in the future. After getting immediate cashflow relief, you’ll then need to commit to the payment schedule. Otherwise, you will incur additional late fees for missed or incomplete payments.
For example, if you borrow $10,000 using the Standard Chartered CashOne Personal Loan for one-year (at 3.88% (EIR 9.19%) p.a.), you will need to make a monthly repayment of about $866 for the next 12 months, or about $10,392 in total.
While the amount you repay is more than what you borrow because of interest, this can be seen as a small fee to pay if it helps you reduce your interest costs in other areas, or provide you with a cash lifeline during a period when you need the money most.
Apply For Your Standard Chartered CashOne Personal Loan Through SingSaver & Stand A Chance To Win Up To $10,000
From now till 30 June 2020, stand a chance to win up to $10,000, or an amount equivalent to your total loan repayment, if you apply for a Standard Chartered CashOne Personal Loan through SingSaver.
For example, if you borrow $5,000 and your total loan repayment is $5,582 (based on a 3-year, 3.88% p.a.), then you will win $5,582. There will be three winners in total, one for each month in April, May & June. Do refer to the terms & conditions for full details of this SingSaver exclusive promotion and how to qualify for it.
To reiterate, you should only take a personal loan as a last resort option for essential needs that you have to continue paying for, and not because you need some extra cash for discretionary purchases or to invest. You should definitely not apply for a loan just so that you stand a chance to win this promotion – this isn’t the lottery.
If cashflow is tight, you should consider lowering your expenses, dip into your savings first or consider government schemes that you may qualify for. All of these won’t incur interest costs or late payment penalties.
With all that taken into consideration, a personal loan can still be a useful option to consider if you have urgent short-term cashflow requirements as long as you can commit to the monthly repayments required in the months to follow.
Apply for the Standard Chartered CashOne Personal Loan Through SingSaver and win up to $10,000 to pay off your loan when your loan is approved from 6 April to 30 June 2020. Enjoy 50% off your first month’s instalment, credited back to you as cash back and get $199 cashback, instant approval and cash disbursal. Terms and conditions apply.