Thinking about taking out a personal loan but not sure what are the requirements and steps you need to take? It’s not that difficult. Read on to find out.
Requirements you have to meet before taking a personal loan
Requirement 1: Minimum annual income
Banks are profit making institutions, not charities. The purpose of loaning money to corporate or individual clients is to make money for its shareholders. Thus, banks want to “guarantee” that you can return the amount that you are loaning.
Unfortunately, most local banks and financial institutions (READ: reputable ones, not shady ones) require a minimum annual income of S$20,000. For freelancers or self-employed individuals, banks might raise the minimum annual income, given that your income might be less predictable in the long run.
Requirement 2: Documents
When applying for a personal loan, banks would want to understand more about your employment situation, your current financial situation and proof of residence. As part of your loan application, you will need to provide the following to the bank (slight variations depending on bank):
- Proof of identity
- Proof of residence (e.g. utility bill, passport)
- Latest bank statement where your salary/income is deposited into
- Salary slips for the last three months
- CPF Contribution Statement
Requirement 3: Meet the credit rating
A credit rating or credit score is used by banks and financial institutions to evaluate whether you are a “good or bad risk” to take a loan from them. Every one of us has a credit rating that is known to every bank and financial institution out there.
The credit rating plays a large role in determining whether you are able to get a loan and also determines the size of the loan you can get. In Singapore, if you have a poor credit rating, banks will either reject your personal loan application or request that you take a smaller loan amount.
Before heading down to the banks to take out a personal loan, do a check on your credit rating to see if you meet the minimum requirement. You wouldn’t want to be wasting time heading to the bank to apply for a personal loan when you are not eligible for one based on your credit rating.
Note: You can easily check out your credit rating from the Credit Bureau Singapore.
Taking out a personal loan in 3 simple steps
Now that you have met all the requirements, you are ready to take the following steps to take out a personal loan.
Step 1: Decide how much you need and why you need the loan
The first step in taking out a personal loan is to decide how much you need to loan from the bank. You also need to ask yourself why you are making this loan from the bank.
As a rule of thumb, banks/financial institutions allow you to borrow between 2-6 times of your monthly income. This amount is also dependent on your credit rating and record as well as whether you have other loans that you have taken out with other banks/financial institutions.
A personal loan is an unsecured loan that can be used for any purpose, from financing a medical emergency, tide over cash flow problems or pay for your over-the-hill wedding. It is important for you to have a clear idea why you are taking on the loan to ensure that you are taking the loan for the right purpose.
This is to allow you to communicate with the banks/financial institutions to see if there could are specific loans (with lower interest) that you can take, e.g. car loan, housing loan, renovation loan or even education loan.
Step 2: Decide between a term loan or revolving loan
Once you have decided and affirmed the amount and reason for the loan, you need to consider between the two loan choices: term or revolving loan.
A term loan is an agreed loan amount that you have to repay within a fixed loan period (e.g. two years). You will also agree on a fixed monthly instalment with the bank so that you are able to repay your loan within the agreed period.
A revolving loan is different in nature to the term loan. A revolving loan, also known as personal line of credit, allows you to withdraw any amount up to your credit limit. Unlike a term loan, you do not have to return the loan within a fixed period of time. You also do not have to agree to any monthly instalment with the bank/financial institution. Instead, you only have to make a minimum payment of 3-5% (of the outstanding loan) or S$50, whichever is higher. Due to the flexibility of the revolving loan, the interest charged by the bank/financial institution is often much higher than a term loan.
Step 3: Shop around for the best loans
Like everything else, you need to shop around for the best deal in the market. After all, if you can pay lower interest rates, why subject yourself to pay higher interest rate on the same loan? Thus, shopping for the best deal is a vital step that needs to be taken seriously.
With so many credit providers out there, how can you compare them efficiently? Surely you don’t have to call each bank, ask them about their personal loan package and track them using an excel sheet, right?
Instead of resorting to such an inefficient method, you can use BankBazaar’s personal loan comparison function. Apart from allowing you to compare personal loans effectively, BankBazaar also helps you to check for loan eligibility by answering a few questions online. This will take you less than five minutes to see if you are eligible for the loan that you have picked out.
With these three steps in mind and having met the requirements, you are ready to pick up a personal loan for your desired purpose from any bank/financial institution in Singapore.