The Life-Changing Power of Personal Loans (a Fact-Based Study)
Updated on: January 11, 2023
Please note that the content of this article is based solely on the opinions of the author. It has not been reviewed, commissioned, or otherwise endorsed by any of our network partners.
If you’re like me and most Singaporeans born before the 1990s, you know that personal loans have a particular stigma. Financial education was next to inexistent for our generations and those older than us. That’s why loans were perceived as a last resort in case of financial distress.
Things are changing now.
And if you’re on this page, you’re open to that change.
In this guide, we’ll teach you how to change your life by taking a personal loan, taking you through all the data and numbers you need.
Keep reading below.
1. Complete That Renovation
One thing I learnt the hard way is renovating your home at the right time has a massive impact on your life. Indeed, whether you need an open kitchen to supervise your toddler or a more Feng-Shui office to increase productivity, a proper renovation can help.
But I, like many Singaporeans, postponed renovations until it was too late. You may be like me:
- You might be wary of renovations and what the process entails. Studies show that 23% of Singaporeans have never renovated their homes.
- You might be wary of contractors. 2021 saw over 1,300 complaints from Singaporeans about unprofessional contractors, 50% higher than in 2020. Understandably, you don’t want to end up with poor craftsmanship.
- You might not have enough money. A Yahoo study points out that 45% of homeowners in Singapore expect to pay $30,000-$50,000 for their renovation works. However, 64% go over their budgets. Besides, 43% of people spend $11,000-$20,000 on furniture and appliances.
All these problems have one thing in common: the lack of funds.
If you had enough money, you wouldn’t be wary about the renovation’s length or duration. You also wouldn’t worry about finding the right contractor or going over their budget.
Why not get a renovation loan, you may wonder?
I’ll tell you why:
Renovation loans in Singapore only allow you to borrow up to $30,000. Besides, you cannot use this money for furniture and appliances, which make up almost half* of your renovation budget.
* according to the statistics above. In my case, furniture and knick-knacks represent much more.
That’s where a personal loan comes in:
- Banks in Singapore can lend you up to ten times your monthly income, though some may impose a minimum salary of $20,000 per month. Alternatively, you can borrow up to six times your monthly income and up to $250,000 if you work with a licensed moneylender.
- You can use this money for whatever renovation or appliance you need.
- The money from a personal loan goes directly to your account, not to the contractor’s account.
- You don’t need to prepare extensive documentation for all your renovation plans. As a result, you can get your loan faster and even change your mind during the process.
2. Take An Abroad Vacation
Taking a vacation abroad once per year is indeed life-changing. I know first-hand that having contact with multiple cultures and experiencing new ways of life can mutate your mindset.
That new mindset helped me progress both in my personal and professional life.
Of course, few Singaporeans will take a personal loan for that purpose – I didn’t, and you may have not either. Studies show 34% of people use their loans to cover daily expenses, help loved ones, and pay their mortgages.
- The median salary in Singapore is $5,070. At the 20th percentile, this figure drops to $2,500.
- Research shows Singaporeans in the lowest 20% income bracket spend $1,146 for travelling, while those in the highest 20% income bracket spend $8,820.
Let’s assume you’re the one who breaks those numbers and gets an $8,000 loan.
Using a personal loan calculator, you find out that a 12-month repayment term results in:
- $710.79 monthly installment
- $8,529.48 total loan cost
- $529.48 total interest
If you’re earning the median salary, that figure represents just 14.02% of it, meaning you can repay it comfortably.
If you were looking for a sign to drop everything and visit book a dream holiday, maybe this is it.
The point is we now know that travelling enriches you mentally and spiritually.
If you don’t view loans as a last resort for emergencies, you can actually reap the advantages that travelling brings.
3. Top Up Your CPF Account
Your CPF account is your retirement safety net, so it’s best to have enough funds for your golden years. One thing I learnt is I can use a personal loan for that in two ways:
- I can top up my own CPF using personal loans.
- I can make retirement top-ups for my loved ones.
This second option comes with a tax relief of up to $8,000 for cash top-ups. Besides, the Matched Retirement Savings Scheme (MRSS) enables the Government to match every dollar of cash top-ups up to $600 per year.
Why does this change your life?
Helping your spouse with the necessary funds for their pension will improve your quality of life during retirement. For example, your spouse may work part-time to raise your family, so they might not secure a high-paying job later in life.
But if you’re doing those CPF top-ups for them, you will benefit from a better life during your retirement years. You’ll also have more cash in your pocket now, thanks to that $8,000 tax relief.
There’s also the matter of paying back your CPF for housing.
80% of Singaporeans live in HDB property. If you’re one of them, you probably used your CPF for the advance downpayment.
And that means we can’t sell our current HDB flats to upgrade until we’ve refunded that CPF amount plus interest.
Let’s say you’ve bought a $600,000 flat with a 20% CPF advance payment. You’ve paid $60,000 of that $120,000 during the years.
You’re now planning to purchase a new property but need to sell your current HDB flat to get a bridging loan.
You can use a personal loan to repay your remaining $60,000 for the CPF account. I made some simulations for you below:
Bank personal loan with 6% APR:
- 84-month tenure
- $876.51 installment
- $73,627.11 total loan cost
Moneylender personal loan with 1% interest/month:
- 36-month tenure
- $1,992.86 installment
- $71,742.96 total loan cost
Pro tip: Use the remaining funds from your sales proceeds to repay this personal loan faster.
4. Build Your Emergency Fund
My emergency fund gives me peace of mind and spares me some essential problems:
- I won’t have to struggle to find an urgent loan when troubles hit.
- I can get better loan conditions now when my financial situation is stable. Urgent loans taken under duress have higher interest rates and lower principal amounts and I don’t want that.
Experts advise that emergency funds should be at least the equivalent of six months of your income. If you’re a freelancer or don’t have a stable income, you’ll need to save the equivalent of 12 months’ earnings.
I crunched some numbers to make it clearer:
- Assuming you earn $5,000/month, you will need at least $30,000 in your emergency account.
- You can put aside $500/month instead of taking a loan. That means you can gather the necessary amount in 60 months – five years. Saving $1,000/month helps you reach your goal in 2.5 years.
The problem is you have to be extremely diligent with your savings for at least 2.5 years to build your emergency fund.
If you can do it, more power to you. But… you might be tempted to save less money or even omit savings altogether during some months.
In my experience, a personal loan can help because:
- This tool is more effective because it gives you accountability: Having those fixed installments and bills allows you to stay on track with repayments. Besides, your loan provider has already calculated a comfortable installment that you must repay monthly.
- You get the emergency fund now, not in 2.5 or 5 years: So, if anything unexpected happens that puts you in a financial bind, you will have the money to solve it.
- You will pay (almost) the same monthly installment: With a 6% APR and a 5-year loan term, your monthly installment is $579.98.
5. Lower Your LTV Ratios
I have had a car loan and home loan in the past and learnt that lowering your loan-to-value (LTV) ratio is essential to get better conditions. A lower LTV entails:
- Smaller loan
- Shorter term
- Lower interest rate
- Smaller repaid amount overall
I’ll take you through more Math:
Let’s assume you want to purchase a $100,000 car. The maximum LTV is 60%, meaning $60,000. With a 4% interest rate, your monthly installment will be $915, and the loan period is seven years.
But imagine getting a $20,000 personal loan beforehand.
A larger cash advance lowers your interest rate to 2% and your tenure to five years, thus allowing you to repay just $734/month.
6. Start Investing
Starting an investment portfolio is not something we’re used to doing in Singapore and I think that’s because we don’t have a strong financial education.
But I also think well-thought investments bring wealth.
Remember: Investing is a long-term strategy that implies building a diverse portfolio with several instruments. Trading means short-term selling and purchasing stocks, making it riskier.
I’m NOT talking about trading here.
Fair warning: Using a personal loan for investment purposes is a two-edged sword. First, you must ensure you can repay the loan comfortably. Secondly, you must ensure your investment will not sink.
Here’s my thought process before I started investing my extra income:
Assume it’s 1982, and you take a $20,000 personal loan from a licensed money lender that offers you a 1% interest rate. You have:
- 36-month repayment term
- $664.29 monthly installment
- $23914.44 total loan cost
- $3914.44 interest
You now take this $20,000 and place them in an ETF that mimics the MSCI world index as a one-off investment sum. You don’t top off your investment; you simply leave this money there until 2022.
It’s now 2022:
- You paid your loan 37 years ago, with $3,914.44 interest over the original amount.
- However, since this particular index has an annual compound value of 7.98% per year, your account now has a net asset value of $427,832.
Basically, just one wisely invested loan in 1982 could’ve helped you earn $423,917.56 without additional top-ups.
Side note: Adding a recurrent monthly top-up of $200 since 1982 could’ve brought the value of your portfolio to $880,104.
7. Start Your Own Business
If you’re planning on starting a new business, you probably already know that 30% of startups in Singapore fail within three years. That high risk is one reason why banks don’t give out business loans so easily.
- While a personal loan can be approved in one or two working days, your business loan can take up to two weeks.
- A personal loan requires less paperwork. Usually, you need proof of identity, residence, and income. A business loan needs extensive paperwork showing your plans and projections.
Pro tip: While a business loan allows you to access more money, your company may need just one small start.
For example, you may need a laptop to start freelancing or a few kitchen utensils to start your home bakery.
I have done the math again and one $10,000 personal loan can cover:
- A firm to help you set up your company
- Kitchen utensils
- Social media advertising (note: you cannot buy paid ads if you’re opening a home bakery from an HDB flat under the Home-Based Business Scheme)
- Ingredients for the next months
If you take a $10,000 loan with one-year tenure and 1% monthly interest, your monthly installment is $888.49.
Besides, a home baker in Singapore earns $300-$1,000/month, so you may start seeing a profit from the first month.
Is Getting A Personal Loan Wise?
After crunching the numbers and reviewing the arguments, I can safely state that getting a personal loan is worthwhile in most cases. The caveat is that you should do thorough research before applying for anything.
First, you must assess how sound your plan is and then you will have to find a provider that offers advantageous conditions.
Banks and moneylenders are not created equal.
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