Are you in the midst of getting a personal loan right now? Or considering of getting one in the near future? Before getting your personal loan from the bank, make sure that you know these three important personal loan tips. Or else, you might end up regretting after securing your personal loan.
Read also: Beginner’s Guide To Taking A Personal Loan
1. How to compare across different personal loans effectively
Comparing personal loan packages is like comparing the coverage of different insurance plans, i.e. it is confusing because of the different technical terms that they use in marketing the loan package. Thus, in order to not be confused by the different loan packages out in the market, here’s a simple tip for you: Always look out for the Effective Interest Rate (EIR) and use the EIR for comparison across different loan packages.
What is EIR and how does it help you to compare personal loans?
EIR is the actual rate incurred for using the loan facility, which takes into account all of the fees and compounding period of the loan. This makes it easier for you to gauge which personal loan package offers the lowest interest rate. The general rule of thumb that one can use to compare between loan packages is “as long as the EIR is lower, it means that the loan package offers a better bargain”.
To compare across different personal loan packages, you have the luxury of comparing them easily through BankBazaar’s personal loan comparison here.
2. Don’t let your personal loan affect your TDSR
In June 2013, Monetary Authority Of Singapore (MAS) introduced the total debt servicing ratio (TDSR) framework to ensure that Singaporeans are taking loans that are prudent and within their means. Under the TDSR, you can use up to a maximum of 60% of your combined gross household income to service all your loans. This means that if your combined gross household income is S$10,000, you can only use $6,000 to service your loan.
If you decide to take on a personal loan before taking out a major loan (e.g. housing or car loan), you need to ensure that you can redeem/pay back the loan before buying your first home or car. In the event that you take out a personal loan and need to take out a major loan in the same period, you will be bound by the TDSR framework. This means that you can take out a smaller loan on to pay for your house because you are already saddled with your personal loan.
3. Make sure you know all the fees and charges (including late and early fees!)
It is important that you know every single detail about the personal loan package that you are taking before you sign on the line. This includes the fees and charges that you will be charged whenever you take on the loan, whenever you make late repayments or even when you make early repayments.
Whenever you apply for a personal loan from the bank, it is important to note that banks charge a processing fee on the approved loan amount. This fee is usually in the form of a % of the approved loan amount. For example, if the bank charges a processing fee of 3%, it means that they will only disburse 97% of the approved loan amount to you. This means that if you need S$50,000 cash, you will need to apply for a personal loan of 100% + processing fee, i.e. $51,546 (100% + 3% processing fee).
Late repayment fees
Earlier in the article, we discussed EIR and how it encompasses all the fees and compounding period of the loan. While the EIR is clearly stated by banks, the EIR is calculated based on the underlying assumption that you pay every monthly instalment on time. But what happens if you don’t manage to make the monthly instalment on time for this month?
If you fail to make a monthly repayment on time, you will be charged a late payment fee by the bank. There are different types of late repayment fee that banks can charge you whenever you fail to make your monthly instalment payment on time, be it flat fee, a percentage of the overdue amount or a mix of both.
For example, UOB charges a flat late fee of S$60 and a late payment interest of 24% (or 4%, depending on your annual income). HSBC charges a 2.5% + prevailing interest rate that you are enjoying on the overdue amount.
Early repayment fees
While it is logical to pay the bank for any late payment, the early repayment fee might be bewildering for most people. In the event that you want to make an early repayment on your loan, you will need to pay an early redemption fee to the bank. This is to make up for the loss of interest fees the banks could have earned from the borrower.
For example, DBS charges a flat fee of $150 on the personal loan if full repayment is made prior to the expiry of the loan tenure. UOB charges 2.5% on the loan amount that you want to prepay.
Be smart and prudent about getting a personal loan
Because we do not know what can happen in the future, it is prudent to understand every aspect of loan, including the fees and charges. This is especially so for unforeseen circumstances like being unable to make monthly repayments or the possibility of a windfall (or bonus) which allows you to redeem your loan early.