From major purchases to emergency expenses, many often turn to personal loans to fund such purchases.
When you decide to take out personal loans in Singapore, you will be faced with two options: either acquire a personal loan from a bank or from an approved lender.
Before deciding who to take out a loan from, here are some tips to help you make the right choice.
What to pay attention to when choosing a personal loan in Singapore
Personal loan interest rate
The interest rate applied to the personal loan varies according to your income, the amount of the loan, the term of the loan as well as your credit score.
Generally, the smaller your loan amount, the longer the loan term, and the better your credit rating, the lower the personal loan interest rate.
When it comes to personal loan interest rates, you’ll often see lenders use the term effective interest rate (EIR), which more accurately reflects the cost of borrowing as it takes into account other fees such as processing fees and loan repayment schedule.
|Case study: Lendela (interest rate: 0.8% per month)|
|Effective interest rate = [(1 + interest rate / number of compounding periods per year )^(number of compounding periods per year)] – 1|
|EIR for one year||[(1 + 0.8 per cent / 12)^(12)] – 1 = 8.029%|
|EIR for two years||[(1 + 0.8 per cent / 24)^(24)] – 1 = 8.031%|
Apart from the interest rate, fees such as processing fees and late payment are the infamous hidden costs of personal loans. When you decide to take out a personal loan, you will inevitably have to pay an application fee, which is basically an application fee.
Processing fees vary between lenders and are usually between 1% and 3% for banks and 10% of the principal, or loan amount, for approved lenders in Singapore.
Additionally, individuals can choose whether they want to pay the fee upfront or deduct it from the actual loan amount upon disbursement.
To help borrowers save even more, approved lenders like Friday Finance offer a refund policy where you’ll be refunded 50% of the processing fee if your personal loan is fully repaid on time.
Monthly repayment translates to the amount you can expect to pay each month, which is determined based on your loan amount, loan term, and personal loan interest rate. Generally, the longer the term of the loan, the lower the monthly repayment.
Along the same lines, banks and approved lenders also charge borrowers a late payment fee if borrowers fail to repay any installment before the deadline.
As mandated by the Department of Justice, Approved Lenders are authorized to charge fees not to exceed $60 per month for late repayment.
Who is eligible for the personal loan?
In general, working people between the ages of 21 and 65 are eligible for personal loans from banks and approved lenders, provided they meet the income requirements.
|Age||21 – 65 years old||18 – 70 years old|
|Income||Citizens of Singapore/PR: USD 20,000||Less than $10,000|
With a lower minimum income requirement for personal loans offered by approved lenders, many who do not meet the banks’ minimum income requirement of $20,000 for Singaporeans and $40,000 for foreigners in Singapore find themselves instead turn to approved lenders.
Boasting of having the most competitive rates for people who do not meet the bank income criteria in Singapore, Lendela is a great alternative that offers flexible funding amounts, fast one-day disbursement and a low requirement. minimum income of S$1,200.
To help you save even more money, Lendela does not charge borrower processing fees. Lendela also capitalizes on technology to compare multiple personal loans available to help you get the best personal loan for your unique situation.
According to Ministry of JusticeThe table below shows the personal loan amount a person can borrow from approved lenders based on their income and nationality.
|Borrower’s annual income||Singapore citizens and PR||Foreigners residing in Singapore|
|Less than $10,000||$3,000||$500|
|At least $10,000 and less than $20,000||$3,000|
|At least $20,000||Six times the monthly income||Six times the monthly income|
Differences between Personal Loans from Banks and Approved Lenders in Singapore
Bank Personal Loans vs Approved Lender in Singapore
Bank personal loans in Singapore generally have a stricter eligibility criterion than approved lenders. While banks allow larger loan amounts than approved lenders, they offer higher interest rates and focus heavily on good credit scores to qualify.
On the other hand, approved lenders are more lenient when it comes to credit scores, as the loan amounts are much smaller and run a lower risk of putting the borrower out of business.
With a higher minimum income requirement of $20,000 for Singaporeans and tighter checks on an individual’s credit rating, the rejection rate for personal loans offered by banks tends to be higher.
As stipulated by the Singapore government, the maximum interest rate on personal loans that approved lenders can charge is 4% per month. On the other hand, interest rates for personal loans offered by banks in Singapore are, on average, 6%.
That said, banks such as POSB/DBS and HSBC have differentiated themselves with market-competitive interest rates, with POSB/DBS having the lowest EIR of 5.79% per annum.
In general, approved lenders have fewer restrictions and have a lower rejection rate.
Besides income, banks often place more weight on an individual’s credit score, an indication of how likely you are to repay debt, than licensed lenders in Singapore.
If you have a history of late payments, your credit rating is likely to be much lower. As such, there will be less chance of qualifying for the personal loan.
To get an idea of your credit score, you can purchase a credit report from the Singapore Credit Bureau (CBS) at $6.42 (including GST).
term of the loan
The term of the loan translates to the time the bank or approved lenders give you to repay your loan.
Approved lenders often offer shorter loan terms than banks, which is beneficial for people who want to save on interest and only need the loan for a short time.
Amount of personal loan offered
Since approved lenders are generally small businesses, they do not have the financial capacity to lose large sums of money if a borrower does not pay.
Thus, the loans they offer do not exceed 1,500 Singapore dollars, against 10,000 dollars offered by banks.
Speed of disbursement
Banks are known to have a lengthy approval process as they often have to review your risk profile including your job, income, and credit rating.
Borrowers pressed for time can turn to approved lenders, who can disburse personal loans as quickly as the same day.
Approved lenders do not review this information because the low amount of personal loans borrowed ensures that you cannot go into debt.
Signs to look out for when getting a personal loan from approved lenders in Singapore
It is common to associate moneylenders in Singapore with loan sharks. However, approved moneylenders are registered with the Ministry of Justice and operate legally, while loan sharks operate illegally.
As such, licensed lenders in Singapore are subject to the rules and regulations imposed by law.
Below are some factors to keep in mind to distinguish an approved lender from an unapproved one.
Consult the list of approved lenders in Singapore
The easiest way to make sure you are not being scammed by an unlicensed pawnbroker is to simply check the list of licensed pawnbrokers in Singapore on the Ministry of Justice website.
Ensure that their practices comply with Department of Justice guidelines
As of October 1, 2015, licensed lenders in Singapore have been legally permitted to charge the following expenses.
|Maximum applicable interest rate||Four percent per month|
|Maximum late fees||$60 per month|
|Maximum commission when granting the loan||10% of loan principal|
|Legal fees||For a successful claim by the lender for loan recovery.|
Apart from this, as required by law, approved lenders must meet the borrower in person at the approved place of business to carry out face-to-face physical verification of their identity before granting a loan.
So which personal loan is best for rainy days?
After comparing the various attributes of personal loans offered by banks and licensed lenders in Singapore, finding the most suitable personal loan in Singapore for you largely depends on your particular situation.
However, it is imperative to note that personal loans in Singapore, whether granted by banks or approved lenders, are expensive.
As such, be careful and borrow what you can afford each time you take out a personal loan.
This article was first published in ValueChampion.