From financing emergency repairs to paying off medical bills, a personal loan offers immediate financial relief.
While it is easy to take up a personal loan, it’s crucial to understand the terms and conditions that go with it. Remember that every lender is different. As such, they offer different loan plans, interest rates, tenure, and repayment flexibility. So take your time in comparing your options.
Personal loan mistakes can be very expensive. To help you enjoy a successful personal loan experience, here are common personal loan mistakes to avoid.
Common Personal Loan Mistakes
1. Choosing a Longer Repayment Loan Than Necessary
When you take out a personal loan, you will have different repayment options. Most banks offer personal loans with a maximum loan tenure of 7 years. If borrowing with a licensed money lender in Singapore, you’ll have the option to pay off the loan between 6 to 12 months.
A longer loan term means you’ll get a lower monthly payment. However, it also means you’re accumulating more interest charges over time. As such, your loan will be more expensive in the long run. Some lenders may also offer higher interest rates for longer repayment loans.
To illustrate:
If you borrow S$10,000 for 12 months at 2%, your monthly payment will be $945.60 but your total interest is approximately S$1,347.20. On the other hand, if you choose a shorter loan repayment of 6 months, your monthly payment is $1,785.26 but you will enjoy a lower total interest of S$711.56.
Consider using a loan calculator to determine the loan amount with a monthly payment that suits your budget.
2. Applying For The Wrong Loan
One of the biggest mistakes a borrower can make is applying for the wrong loan. For instance, if you need funds for your start-up business, it’s best to consider taking a business loan instead of a personal loan.
Why? Because business loans are dedicated to your business needs. Additionally, personal liability can be limited should the business default. This is worth considering since new businesses are high-risk endeavors. Lastly, you can qualify for large loan amounts at longer repayment periods, which is more beneficial for start-ups.
Comparing Personal Loans vs Business Loans
Some Singapore banks offer up to S$20 million in financing for business loans while with a personal loan, you can only borrow up to 4x your monthly salary.
Licensed money lenders in Singapore offer up to S$200,000 business loan amount and up to 6x your monthly income for personal loans. Additionally, interest rates between personal and business loans differ. Licensed lenders charge between 5% and 15% for business loans while personal loans are capped at 4% per month.
That said, choose a business loan only if you need a considerable amount of money for your business. Personal loans, on the other hand, are a good option if you need money quickly and want to build your personal credit history.
3. Not Comparing Loan Options
When shopping for the best loans, don’t limit your options to traditional banks and your local credit union. There are also trusted licensed money lenders that offer great loan packages.
That said, personal loans from different lenders are not made equal. You might miss out on great offers if you hastily apply for the first personal loan offered to you. You need to shop around and compare different loan offers to find the most favorable terms.
Loan comparison platforms, such as Loan Advisor, will help you compare personal loan packages. You need to invest time and effort in doing your due diligence. Here are a few things to consider:
- The lender’s information
- Interest rates
- Additional charges
- The maximum loanable amount
Doing so will help you determine which is the best personal loan package for your financial situation.
Tip: When comparing personal loans from different lenders, provide all lenders with the same request – the same loan amount and term. Also provide the same information regarding your credit score, income, and any existing debt. Doing so will give you an accurate quotation.
4. Not Taking Into Consideration the Additional Charges and Fees
You probably know that you must take into account the interest rate charges and the monthly payments before taking out a loan. For example, when you take out a personal loan with a licensed moneylender, the maximum interest rate they can charge is 4% per month.
But did you know that you also need to consider the additional charges and fees as well?
- Processing fee: a fee not exceeding 10% of the principal of the loan when a loan is granted
- Late payment fee: a fee not exceeding $60 for each month of late repayment
- Other charges: legal costs ordered by the court for a successful claim by the moneylender for the recovery of the loan
Tip: Before applying for any loan plan, ask the lender about the different fees and charges involved in taking up a loan with them. Some moneylenders offer discounts for early repayment.
5. Failing To Make Monthly Loan Payment On Time
With a traditional bank personal loan, you can borrow up to 10x your monthly salary if you meet the eligibility criteria. If borrowing with a licensed moneylender, your maximum loan amount is 6x your monthly income. But just because the lender is willing to lend you X amount, doesn’t mean you should borrow X amount.
Most lenders use certain metrics to determine whether you can afford their loan, such as the debt-to-income ratio. However, this doesn’t take into account your other existing expenses, such as utilities, childcare costs, medical conditions, and more.
Here are a few tips:
- When agreeing to a loan repayment plan, take your other expenses into consideration as well
- Create a budget plan that indicates your income vs your total expenses
- Determine how much money you have left after deducting your monthly obligations
Failing to make monthly loan payments on time will lead to a high interest rate and late fees. As a result, your debt will snowball, making it harder to repay.
Frequently Asked Questions
1. Can a Personal Loan Be Reversed?
Each financial institution has different rules with regard to personal loan reversal or cancellation. Most banks in Singapore allow borrowers to cancel their loan application at any point until the approval stage. Once the loan is approved, there is no way to reverse or cancel the loan.
When applying with licensed money lenders, a loan officer will get in touch with you upon submitting your personal loan application. During that time, you may cancel your loan application – as long as the loan contract is not yet signed.
However, it is best to ask the lender or financial institution if they charge cancellation fees or other charges if and when you cancel a loan.
2. What Is the Most Important Mistake To Avoid if You Get a Loan?
Before applying for a loan, there are important factors you need to consider to avoid the debt trap. As previously mentioned, you need to understand the terms and conditions of the loan before signing the agreement. Plus, you also need to make sure that you can afford the monthly repayments to avoid incurring late interest rates and late fees.
Another important mistake to avoid is not paying attention to your credit report and credit score. If you have a good credit score, you’ll likely enjoy lower interest rates and an easy approval process. Banks are known to put a lot of weight on credit scores when evaluating loan applications.
Fortunately, licensed money lenders are less strict with the borrower’s credit score. Legal lenders in Singapore will also consider other factors, such as income, existing debt balances, and overall financial situation.
3. What Happens if You Cancel a Personal Loan?
As mentioned previously, you may be able to cancel your personal loan application before it is approved and before the loan proceeds are disbursed.
However, once the principal loan amount is deposited into your account (or delivered into your hands), there is no way to cancel the personal loan. The moment you sign the loan contract, you are legally obligated to fulfill the loan agreement.
So what happens if I don’t use the loan?
Even if you do not use the loan, you will need to make repayments on time. Failing to make repayments will lead to late fees and late interest rate charges.
Another option is paying off the loan earlier than the agreed term. It is best to ask the licensed money lender or financial institution about the fees involved regarding early loan repayment.
Tip: Before taking out a personal loan, look for a legal lender that does not penalize you for early loan repayment.
4. Can I Restructure My Personal Loan?
In the event that you can’t repay your loan, maybe due to unforeseen circumstances, you can reach out to your lender and negotiate for a loan extension. Most licensed lenders will help you to restructure your personal loan. In doing so, your loan tenure will be stretched out, making repayments more affordable.
5. What other types of loans are available in Singapore?
- Foreigner loan – Similar with personal loans but requires different eligibility criteria.
- Payday loan – Perfect for making the ends meet. You need to pay back the loan within the month or on your next payday
- Bridging loan – With this loan, you can get an ample amount of cash for your new property while waiting for the sale proceeds of your old home.
Closing
Personal loans are a great option if you need immediate cash for emergency expenses or big-ticket purchases. While there isn’t a limit to how you can use the loan proceeds, make sure to use it for your intended purpose. Lastly, learn from the common mistakes listed above to avoid further financial strains.
Key Takeaways
- Consider choosing a shorter loan tenure to save on the total interest paid. However, make sure that you can afford the monthly repayments.
- Choose the right type of loan for your intended purpose. Personal loans are perfect for covering a wide variety of personal financial circumstances.
- Compare different personal loan packages – interest rates, tenure, and terms, before sending your application.
- Don’t forget to consider the additional charges and fees, such as processing fees.
Use a loan comparison platform, like Loan Advisor to find the best personal loan plan for your needs. Loan Advisor offers free, unbiased, and up-to-date information about the best loan packages from the top licensed money lenders in Singapore. Request up to three loan quotes today!
