How Does a Personal Loan Work in Singapore? What are its Pros and Cons?

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Updated on: January 10, 2023

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Getting a personal loan in Singapore can be an attractive option for many, as it provides quick access to funds that can be used for various purposes.

Personal loans typically have lower interest rates than credit cards and do not require any collateral or guarantors. They are also relatively easy to apply for and the process is usually fast and straightforward.

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Pros And Cons Of A Personal Loan

Getting a personal loan in Singapore is not a perfect solution. This section will help you out with all the advantages and disadvantages to consider.

1. Penalty Charges

Firstly, if you fail to make payments on time or go over your agreed limit, you could face penalties such as late payment fees or higher interest charges.

According to OCBC Financial Wellness Index 2022:

31% of Singaporeans had unsecured debt in 2022, a 7% increase from 2021, and:
19% of those people have problems managing their loans
35% worry about not being able to repay their personal loans

It’s not just about personal loans. This report found that:

40% of Singaporeans have problems repaying their mortgage loans on time

Let’s see what happens if you miss a payment.

Assume you have taken an $8,000 loan for two years. First, notice that there’s not much difference in monthly installments for banks vs licensed moneylenders:

$359.20 at DBS Bank (excluding the $80 processing fee)

And $422.97 for a licensed moneylender like Lending Bee that offers a 2% interest.

* Disclaimer: Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability

If you are late with one payment, you can be charged:

$69.92 total penalty: The bank loan
$74.66 total penalty: The money lender’s loan

The following month, you will have to pay $248.09 + $248.09 + $69.92 = $566.10 (for the bank loan):

If you cannot make this payment either, you will add another $82.64. So the third month’s installment will consist of:

The current installment
The previous two missed installments
Late payment fees for the first and second months

That adds up to $896.83. As you can see, missing just two payments can snowball your debt considerably. As you can see, staying on top of your payments can keep your debt from quickly becoming unmanageable.

2. Minimum Income

Some lenders may require a minimum income level before approving a loan application. That means those with irregular incomes or low-level salaries may find themselves ineligible.

The usual threshold for banks in Singapore is $20,000. However, licensed moneylenders have specifically tailored solutions for people earning less than that.

According to the Moneylenders Act, the maximum sums you can borrow if you earn less than $20,000/year are:

$3,000: Singaporeans and PR, plus foreigners with annual incomes between $10,000 and $20,000
$500: Foreigners with annual incomes below $10,000

3. Compounding Interest

Taking out a loan means incurring extra costs in the form of interest payments, which can add up over time.

A $10,000 loan with a 3-year term has a monthly installment of:

$310.11 at DBS
$392.33 at a licensed money lender

Disclaimer: Do note that the interest rate and processing fee offered to you may differ slightly from the published rate, as the actual rate is based on your personal credit profile or your repayment ability

Notice that these installments are very similar. Most Singaporeans unjustly believe that licensed money lenders are as bad as loan sharks. But when you put the banks’ and the moneylenders’ installments side by side, you notice their payments are similar.

Therefore, both types of institutions will see proportional increases in total loan costs:

Total loan cost is: $11,264 for the bank and $14,123.88 for the money lender
Total interest is: $1,264 for the bank and $4,123.88 for the lender

Let’s tweak the conditions a bit and select a two-year tenure:

Bank:

Monthly installment: $449
Total loan cost: $10,876
Total interest: $876

Money lender:

Monthly installment: $528.71
Total loan cost: $12,689.04
Total interest: $2,689.04

Therefore, subtracting one year from your tenure:

Doesn’t make you save an impressive amount on interest for the bank loan. The difference is much more obvious for the money lender’s loan.
However, the difference in monthly installments can prove burdensome for your budget.

4. Quick Access to Funds

On the plus side, personal loans can help you get quick access to funds for a variety of purposes, including making important purchases such as home improvements or covering medical expenses.

Take this example:

A renovation loan can only be up to $30,000. The money goes into your contractor’s account, and you cannot use it for appliances or furniture.

Conversely, a personal loan can go up to:

Ten times your monthly income: Singapore banks
Six times your monthly income: Licensed moneylenders

More importantly, you can use it to purchase furniture and decorations. And the money is wired to you directly, not your contractor.

So, if you are earning $5,000/month, your personal loan can be up to $50,000. That gives you a wiggle room of $20,000 extra to make your home perfect.

5. Convenient Conditions

Most lenders offer competitive interest rates and often require minimal documentation, which makes them more accessible than other types of loans.

The usual requirements for personal loans include proofs of:

Identity: NRIC or Passport
Income: Typically computerised payslips for the past three months; may also be CPF statements or Notice of Assessment for the past 12 month in the case of self-employed people
Address: Utility bills or official letters

What Can You Use A Personal Loan For?

A personal loan in Singapore can be used for a variety of purposes.

These include:

Financing large purchases like furniture and appliances
Refinancing existing debt
Funding home renovations and repairs
Making investments such as stocks or mutual funds
Paying off medical bills

And more.

Take this example:

An $7,000 massage chair at 3.88% interest and 2-year tenure makes your monthly installment $314.30. Meanwhile, the total added interest rate is only $613.20.

Source

However, not getting that massage chair now can skyrocket your medical bills and pain in the future.

Where Can You Apply For A Personal Loan?

There are various lenders in Singapore offering personal loans, including:

Banks
Licensed moneylenders
Peer-to-peer (P2P) platforms

The best option for you depends on factors such as:

Loan amount required
Repayment terms
Interest rates offered

It is therefore important to compare different options before making a decision. For example:

Banks in Singapore offer personal loans with competitive rates and repayment terms ranging from three to five years.
Licensed money lenders who often provide more flexible loan packages compared to banks but come with higher interest charges and less protection.

Pro tip: Seek advice from financial advisors if needed before making any commitments.

What To Consider Before Taking Up A Personal Loan

When weighing your options, it is important to consider whether the lower costs associated with bank loans outweigh the flexibility of money lenders, or vice versa.

Ultimately, it is important for you to take the time to understand your own financial situation and needs before applying for a personal loan.

With a personal loan, you can enjoy the convenience and flexibility of having access to extra funds without needing to put your home or other assets at risk.

Whatever your reason for taking out a personal loan in Singapore, it’s important to remember that loans should always be repaid on time so as not to incur late fees or damage your credit score.

So ensure that you adhere to the repayment schedule in order to avoid any adverse consequences associated with late payments.

Choose The Right Loan And Lender

It’s also important to work with an experienced lender to ensure the best terms and conditions possible. With the right personal loan, you can make financial decisions that are tailored to meet your specific needs.

Taking out a personal loan in Singapore adds more freedom and flexibility when it comes to managing your finances.

But as always, it’s important to be mindful of your finances and ensure you can keep up with payments on any loan taken out.

That leads to a smooth borrowing experience, helping you enjoy the financial freedom of those extra funds bring.

Remember: With proper research and planning, you can make informed decisions that will help you achieve their financial goals.

Furthermore, it is always advisable to contact a financial professional for further assistance.

With professional help, you can have greater peace of mind when taking out a personal loan from either a bank or licensed moneylender.

Pro tip: For more information about personal loans in Singapore, you can refer to the Monetary Authority of Singapore’s website for detailed guidelines and advice.