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Personal Loan Vs. Credit Line: Benefits and Risks

Personal Loan Vs. Credit Line
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There may come a time when you find yourself in need of financial support. Perhaps you need to pay an unexpected medical expense. Maybe you are faced with a major home repair. You might even want to take out a loan with a lower interest rate for debt consolidation.

If you need financial assistance, a personal loan or personal line of credit can help you achieve your goals. Both types of financing allow you to borrow funds for just about any purpose. However, they work differently.

A personal loan is a type of installment loan, which means you will receive a lump sum and make fixed principal and interest payments. A personal line of credit, on the other hand, is a type of “revolving loan” and works similarly to a credit card. The amount you can withdraw is dynamic – as long as it is within your credit limit, and make regular payments of both a principal and interest to pay it off.

  Personal Loan Line of Credit
Type of Credit Installment loan Revolving credit
Repayment Terms Fixed monthly repayment Ranges from daily to monthly to yearly repayments
Loan Tenure Up to 7 years Open-ended
Interest Rate Interest accrues on the full loan amount right away. The interest rate ranges between 3.7% and 4.5%. Interest accrues only when funds are accessed. Interest rate is variable and averages between 18.6% p.a. and 20.9% p.a.
Fees Typically includes a processing fee and may have other fees and charges, such as repayment fees and late fees Typically charges an annual fee.

 

Access to Funds Borrowers have access to funds in one lump sum Borrowers have access to a preset credit limit that they can use any time, pay back, and borrow again.

 

How Credit Affects Your Score

Financial institutions will look into your credit report to determine your credit risk. A high credit score will help you get approved easily plus, you’ll enjoy lower interest rates and higher loan amounts. Bad credit scores will make it hard to qualify for a personal loan or a personal line of credit. Know more about how to improve your credit score

This is how credit affects your overall score:

  • Amount of credit used: The more debt you have, the lower your score.
  • The number of credit facilities open: If you have a lot of credit facilities open or you have been taking on new credit facilities, banks may think that you are over-extending yourself.
  • Late loan repayments: If you have a history of late repayments, it will also negatively affect your credit score. Late payment is also known as “delinquency” and is regarded as a red flag by financial institutions.
  • The length of your credit history: Banks and financial institutions prefer borrowers with a longer credit history than a shorter one.
  • The number of inquiries: Every time you apply for a new loan or personal line of credit, the financial institution will inquire into your credit score. This will be noted in your credit report. Frequent inquiries will negatively impact your score since it gives a signal that you’re taking on more debt.

 

When Should I Choose A Personal Loan?

A personal loan is best for making large, one-off expenses. However, it can be used for a variety of purposes, such as debt consolidation, major medical expenses, and minor home repairs. Find out what are the things to consider before taking out a personal loan

Personal loans have two general forms – secured and unsecured. With a secured personal loan, you can borrow any amount since it is backed by some form of collateral, such as your property. Unsecured loans, on the other hand, are not backed by collateral. It relies on your credit history and credit score.

Benefits:

  • Can be used to pay off large, expensive purchases
  • Offers a lower rate than a personal line of credit
  • Fixed monthly payments throughout the loan term
  • Have a fixed payment schedule
  • Have access to cash in one lump sum

Risks:

  • Typically charges processing fees and other additional charges
  • Failing to pay a secured loan will put your property at risk of being repossessed.
  • Meant to be taken out infrequently
  • May negatively affect your credit score if you frequently take out a personal loan for small purchases.

 

When Should I Choose a Personal Line of Credit?

A personal line of credit is best for individuals with an unpredictable or inconsistent source of income. This financing option will help you tide over gaps in income. Here are other uses of a credit line:

  • On-going home renovations
  • Small, everyday purchases
  • When you don’t know how much money you’ll need for a particular expense

With a personal line of credit, you can withdraw money anytime from your credit line. Interest is accrued once you make a withdrawal. Plus, the interest is based on the amount withdrawn and not on the whole credit limit.

Benefits:

  • The credit limit can be used any time
  • Borrow only what you need as long as it is within the credit limit
  • Interest is charged on the outstanding balance only, not the entire credit limit
  • Can be used for any purpose

Risks:

  • Credit lines tend to have higher interest rates than personal loans
  • They have a lower credit limit than the amount you can borrow from a personal loan
  • Typically, interest accrues on a daily basis on the outstanding balance in your account.
  • It charges a variable interest rate which means you don’t pay a fixed amount every month.

 

Best Personal Loans and Line of Credits in Singapore November 2021

Bank offering Personal Loan Interest Rate Loan Amount Minimum Income Repayment Period
HSBC Personal Loan 3.4% p.a.

 

EIR: 6.5%

Up to S$100,000 S$30,000 for Singaporeans/PR Up to 7 years
Standard Chartered CashOne 3.48% p.a.

 

EIR: 7.3%

Up to S$250,000 S$20,000 for Singaporeans/PR Up to 5 years
DBS Personal Loan 3.88% p.a.

 

EIR: 7.9%

Up to 4x your monthly salary if your annual income is less than S$120,000 S$30,000 for Singaporeans/PR Up to 5 years
UOB Personal Loan 3.4% p.a.

 

EIR: 6.42%

Loans starting from S$10,000 S$30,000 for Singaporeans/PR Up to 5 years
Citi Quick Cash 3.45% p.a.

 

EIR: 6.5%

Up to 4x your monthly salary S$30,000 for Singaporeans/PR Up to 5 years

 

Bank offering Personal Line of Credit Interest Rate Maximum Credit Limit Minimum Income Annual Fee 
HSBC Personal Line of Credit 18.5% p.a. Up to 4-8x your monthly salary or S$200,000 S$30,000 for Singaporeans/PR S$60

waived for the first year

Maybank CreditAble 9% p.a. Up to 4x your monthly income S$30,000 for Singaporeans/PR S$80

Waived for 2 years

DBS Cashline 20.5% p.a. Up to 4x your monthly salary S$20,000 for Singaporeans/PR S$120
UOB CashPlus 0% p.a. for 3 months; 4% p.a. for 6 months; 6% p.a. for 12 month

 

Otherwise, 20.5% p.a.

Up to 4x your monthly salary S$30,000 for Singaporeans/PR S$120
OCBC EasiCredit 29.80% p.a. Up to 2x your monthly salary S$20,000 for Singaporeans/PR S$80

 

Should I Take Out A Personal Loan or a Line of Credit?

The best financial product is the one that fits your situation best. Plus, it’s also a good idea to choose one that will help you save more in the long run. This means comparing several factors, such as loan amount, interest rate, and loan tenure.

For instance, if you know exactly how much you need to cover costs on a project or expense, consider getting a personal loan. With this option, you’ll be charged at fixed interest rates and you’ll have fixed monthly payments. This makes it easier to create a budget.

However, if it is an ongoing project or you need access to funds to tide over gaps in your income, you may want to consider getting a credit line. This allows you to take out only the amount you need. However, keep in mind that a credit line charges a higher interest rate. Moreover, interest accrues on a daily basis on the outstanding balance.

 

Multiple Credit Cards

Frequently Asked Questions

 1. Is It Hard To Get A Personal Loan or A Personal Line of Credit?

As long as you meet the eligibility requirements of the bank or financial institution, you can easily take out a personal loan or open a credit line.

If you’re a cardholder and have good credit, bank officials may encourage you to avail such financial products. However, don’t do it unless it becomes necessary.

 

2. What Options Do I Have If I Don’t Qualify For A Personal Loan Or Credit Line?

You may turn to a licensed moneylender in Singapore to get the financing you need. These licensed moneylenders can provide loans even when you have poor credit. You can find the complete list of licensed moneylenders on the MinLaw website.

With a licensed moneylender, you can borrow money up to 6x your monthly salary at an interest rate of up to 4%. Licensed lenders are required by law to thoroughly explain the terms and conditions of the loan in a language you understand.

 

3. What Are The Limitations Of A Personal Line of Credit?

A credit line gives you access to funds whenever you need them. This means you can withdraw only the amount you need and be charged interest for only the outstanding balance. This gives you more flexibility than personal loans. 

However, a line of credit charges a much higher interest rate than a personal loan. Lastly, not all banks offer foreigners the option to apply for a credit line.

 

4. How Do You Repay A Personal Line of Credit?

A line of credit has flexible repayment schemes. With a credit line, you can withdraw whenever you want and repay whenever you want. However, make sure to repay it as soon as you are able since some banks charge interest daily.

If you repay early, you won’t be incurring additional fees, unlike a personal loan that charges early repayment fees.

Some banks, such as HSBC personal line of credit, require you to repay a minimum of 3% of the outstanding balance or S$15, whichever is higher. So make sure to ask your bank about the terms and conditions of the credit line.

You can repay through any of the following options – depending on your bank:

  • Bank branches
  • ATM
  • Internet banking
  • SingPost branches
  • AXS station
  • Cash deposit machine
  • Via cheque

 

5. What Are The Fees & Charges Associated with Personal Loans and Credit Lines?

Personal Loans:

  • Processing fee
  • Late fees
  • Early repayment fees

Personal Line of Credit:

  •  Annual Fee – some banks offer a waiver for the first year
  • Late charges
  • Administrative charges
  • Returned cheque fee

Keep in mind that when you borrow money from any credit facility, you’ll pay interest plus other fees. The fees and charges may vary per bank or lender. So make sure to fully understand the loan terms and conditions before taking out a loan or applying for a credit line.

 

Final Word: Which is Better For You?

Key Takeaway:

  • Personal loans and lines of credit allow you to borrow quick cash for just about any purpose.
  • With a personal loan, you will receive a lump sum, and will subsequently make principal and interest repayments based on a monthly payment schedule.
  • A line of credit is a flexible loan with a set amount of money that you can access as needed.
  • With personal lines of credit, the interest is charged only on the amount you borrowed and accrues daily.

Still unsure which credit facility to choose? The first thing you need to take into account is the purpose of the loan. What do you need the cash for? 

If it’s a large, one-off purchase then a personal loan may be a good option. But if it’s for an ongoing project or if you’re using the cash to tide over gaps in your income, then a credit line would be a better choice.

You can also turn to a licensed moneylender for financial assistance. Loan Advisor is the best one-stop loan comparison portal to find the best deals. Request up to three loan quotes from the top licensed moneylenders in Singapore for free today to find the best loan package for your needs.

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