Do you know that banks in Singapore are not the only sources of personal loans? You can also apply for a consumer loan from licensed moneylenders. Fees vary depending on the type of lending company, and you should avoid transacting with an unlicensed lender to avoid becoming a victim of fraud.
Since personal loans are arguably the most popular type of debt instrument, it is not surprising that there are common misconceptions from the loanable amount to income requirements and fees. Read on to find out more about these common myths.
1. There Is No Better Way Than Personal Loans to Pay Off Credit Card Debt
This might be true 10 years ago. However, lenders have become more flexible on their loan products to borrowers. If you need to borrow money to settle credit card balances, a debt consolidation plan is a much better option. The Monetary Authority of Singapore introduced a loan consolidation program in early 2017. It lets you borrow money specifically for payment of your financial obligations.
Since there is a specific reason for using the money, debt consolidation usually has a lower interest rate than a personal loan. The average interest rates for some banks even range from as low as 0.1% to 0.8% between one and seven years.
2. Personal Loans Negatively Affect My Credit Score
A personal loan does affect your credit score as a borrower, but this usually changes once you avoid a late payment or debt default. You might think that it is counterintuitive to take out a loan when you are already neck-deep in debt. On the contrary, taking a personal loan such as a debt consolidation plan helps you to manage payments more easily.
Besides, credit bureaus focus more on your payment history and income as these two reflect your trustworthiness and financial capacity. However, do not borrow the maximum amount in a loan application just because you are approved, which brings us to the next misconception.
3. It Is Not Bad to Borrow the Maximum Amount
Who does not want extra cash on hand for emergencies? While it feels good that moneylenders trusted you with a high sum, you should remember that the money earns interest until you have fully paid the principal. Stick to the necessary amount required to pay off existing debt or an urgent life expense.
Taking out the maximum amount to afford a new smartphone or TV is not a wise financial decision. These luxuries should be paid with your income or savings fund. When you are overwhelmed with the prospect of being approved for a large loan amount, ask yourself if you can still afford monthly payments if you experience problems like a sick family member or home repairs.
4. You Need to Earn At Least $30,000 Per Year
Most banks require you to have an annual income of $30,000 to apply for loan products. Even if you only earn less than the required amount, you can still borrow funds from licensed moneylenders. Self-employed individuals also do not have to worry about having a fixed salary just to qualify, as long as they can present the necessary documents.
Keep in mind, though, that the principal amount that you can borrow will be very limited if you earn less than $30,000 per year.
5. Moneylenders Charge the Same Interest Rate
This is not true simply because banks and licensed moneylenders have different criteria for approving loan applications. Banks are stricter because of their business nature to avoid high-risk borrowers, who should then consider applying for licensed moneylenders. Look out for the effective interest rate (EIR) and annual interest rate when comparing different loan offers.
The EIR in Singapore usually ranges between 9% and 26% per based on several factors such as loan tenure and your credit history.
6. Your Loan Application Will Not Be Approved With a Low Credit Score
Is your credit score below 700? You can still apply for a loan from a bank or money lender depending on your annual income. Most borrowers assume that lenders will reject their application if they have a low credit score, which is not true. Those with a high-credit score get to enjoy lower interest rates and higher principal amounts. The opposite applies to most consumers with a poor credit record.
7. Collateral Is a Must for Personal Loans
Most personal loans do not need to be secured, which means you need to declare your house or another valuable possession as collateral. Whether you apply for a personal loan, credit card or personal line of credit, you do not need to give the title of your home or car to borrow money. The situation is different if you need to apply for a housing or auto loan.
8. It Takes Long to Be Approved for a Personal Loan
Some moneylenders can even approve your loan application in as fast as an hour! So believing that personal loans take too much time for approval is no longer true. Some banks can also approve your application within 24 hours as long as your documents are complete. Borrowers also do not need to do a lot of paperwork for personal loans, especially if applying online.
9. My Spouse Will Be Affected If I Miss Loan Payments
This one is technically true depending on the context. If you are a sole borrower on a personal loan account, your spouse will not be affected if you forget to repay the loan on time. A joint credit account is a different story. Both of your credit scores will decline if either one of you fail to pay the monthly installment on or before the due date, even if you were not the one who took out a loan.
Talk to a financial adviser or consumer loan expert before deciding to borrow money. If you have no time for that, there are a lot of online resources available. For instance, you can also use our loan comparison tools to know more about the best personal loan options, including from a Singapore licensed moneylender.