While personal loans come with many benefits, they don’t come without risks. When seeking a personal loan, think about the deep “why’s” and make sure that getting a loan is aligned with your financial goals.
Additionally, you should also have a clear plan on how you are going to repay the loan. Otherwise, you may commit huge personal loan mistakes that could cost you time and money.
Discover the common “haiya” many borrowers made and learn how to avoid these pitfalls to become a smart borrower.
6 Common Personal Loan Mistakes to Avoid
We’ve listed some of the common mistakes committed when taking personal loans and how you can avoid them.
1. Not Shopping around and Comparing Options
Major banks in Singapore are held at a high standard when it comes to financial products, personal loans included. Still, being a prudent borrower, you need shop around and compare your options.
Note that when comparing loans across banks, you should provide all banks with the same loan amount and preferred repayment terms. Doing this, as financial experts say, helps you get the best rates, more favorable term, and save money in the long term.
Banks are reliable sources of funds, but there are many factors that essentially matter, such as interest rate, loan term, and other more. Choose one that will work in favor of your current financial situation.
To save time, you can also use a loan calculator or the services of a loan comparison service provider.
2. Using a Personal Loan for your Business
While personal loans are ideal for just about anything, it would be better to get a business loan if you are using it to fund your business’ needs.
Personal loans are easier to qualify but it is not always a good idea to use it for business. For one, borrowing a personal loan means you are putting your personal credit at stake in case you can’t repay the loan. Additionally, they may be less cost-effective for an experienced business owner.
3. Not looking at your Credit Score before getting a Personal Loan
Interest rates usually depend on the borrower’s credit score and creditworthiness. Given this, make sure that you’ve checked your credit score before applying for a personal loan. Otherwise, you won’t get approved or risk getting a loan with a high-interest rate.
If you have an existing bank account and a satisfactory relationship with them, they may give you favorable personal loan terms. However, if your credit score is far from perfect, you can work on improving your rating over the next months. You can do this by paying bills and repaying your loans diligently and on time.
4. Applying for an Amount that is more than what you need
If you get a loan that is more than what you need, you may be tempted to use some of the funds for unnecessary purchases. If you only need a few hundred, you may try borrowing from family and friends instead.
A good rule of thumb on this is to borrow within your means. If you use the 50/30/20 rule, you should only allocate 50% to needs, 30% to wants, and 20% to savings. Debt repayment will fall under the needs category and ideally, your debt-to-income ratio should also be in a good range.
You should also try to use the bank’s loan calculator to get a good view of how you can afford to pay.
5. Not Understanding the Fine Print of the Loan
Sometimes, borrowers get excited knowing that their loan application got approved. But like any contract, you should understand what is written in it and that you agree with the term before signing on it.
The loan contract includes the due dates, repayment schedule, interest rates, and acceptable methods of payments. Make sure you understand everything, if not, ask the loan officer to explain terms and conditions which are unclear to you. Otherwise, you could violate some terms or get charged with some fees.
6. Using a Personal Loan for Wants
Personal loans are not a free-for-all source of funds and should only be used for the right reasons. But sometimes some borrowers, especially those without steady income tend to use for purchases that don’t require urgency.
When this happens, you may have trouble committing to the monthly repayments. Missing out on a loan payment will reflect on your credit report and will have an adverse effect on your credit score or credit rating.
It is always better to use the funds for something that is urgent such bills or repairs. As financial experts would say, all financial decisions will affect your financial goals.
Here’s when you should not get a personal loan:
- You tend to overspend and make unnecessary purchases
- You can’t afford the monthly repayments with your current finances
- You are borrowing money for a non-essential trip or vacation overseas
- You intend to use the funds for splurging or gambling
- You don’t need urgent money
Personal loans also greatly affect one’s credit score and credit reporting agencies will keep a record of it. So don’t take a loan unless you really need it. In doing so, you will be able to preserve your credit utilization ratio and have a lifeline when the time comes when you really need to get a personal loan.
Good to Know
What is a Personal Loan?
Personal loans are the most common type of loan in Singapore as they are easy to access from most banks. You can quickly obtain these from a bank, a local credit union, and other financial institutions. Since they are unsecured loans, they are also easier to get than home equity loans and secured types.
These loans are versatile and can fund almost anything – from unexpected expenses to large purchases and even debt consolidation. Other examples of expenses that personal loans can cover include:
- Medical bills
- Home renovations or improvements
- Funding a business
- Funeral costs
- Big ticket purchases such as for gadgets or appliances
- Wedding expenses
- Moving out expenses
- Vacations
- Pay an existing debt or debts from other creditors
How Does a Personal Loan Work?
Personal loans are unsecured loans with a fixed interest rate, a fixed monthly loan payment, and can be repaid within a specific period. But while these loans don’t come with collateral, borrowers should still have a good sense of responsibility to avoid legal repercussions.
Before taking the plunge, here are some essential factors to consider:
1. Loan Amount
One essential factor to consider when getting a personal loan is the loan amount. Knowing how much you can get and if the funds are enough to cover your needs can help you decide whether to pursue the loan.
2. Interest Rate
Interest rates represent the cost of borrowing and vary across different banks. You can get personal loan offers with the lowest interest rates and excellent repayment terms if you have an excellent credit score.
Personal loans, being unsecured, present a higher risk to banks. Aside from credit score and credit history, interest rates may also depend on a borrower’s income and current financial situation.
3. Loan Tenure
Different banks also offer varying repayment periods. More extended repayment periods may mean a lower monthly payment but higher interest costs. Meanwhile, you can save money on interest with a shorter repayment period. Choose a repayment period or a monthly payment schedule that will work best on your income level and cash flow.
4. Other Fees
Banks, credit unions, credit companies and other financial institutions may impose varying fees. Some of these fees include:
- Origination fees
- Processing fees
- Prepayment penalties
- Late payment fees
5. Loan Approval and Disbursement Speed
Depending on the bank, a personal loan may be approved within a day or two, and you may also receive the funds almost instantly. If you need the money urgently, choose a bank that can process your loan quickly and hassle-free.
Other Alternatives to Personal Loans
Personal loans are a great alternative to high-interest credit lines such as credit cards. Still, personal loans are not cut for everyone. It can also be an expensive source of funds if you don’t pay it off quickly and within the bank’s terms and conditions. Below are some alternatives to consider:
1. Balance Transfer Credit Cards
If your debt comprises mainly credit card balances, then you may want to consider a balance transfer. This method is a type of debt consolidation that credit card providers offer. You can take advantage of a 0% annual percentage rate (APR) or pay off your debt within the introductory period.
2. Borrowing from Friends and Family
Borrowing from family and friends helps you avoid borrowing at high interest rates. If you only need a small amount, this could be a good option. Make sure to set up a budget beforehand and pay back what you owe on the promised date.
3. Pawnshop Loans
If you have valuable items such as jewelries and electronics you may temporarily exchange them for a pawnshop loan. Or, you can also go to a luxury jewelry dealer as they can offer more value for your item.
Pawnshop loans could be an excellent alternative as they lend up to six months and this term resets every time you make a partial payment. This reset gives you more time to prepare funds and recover your item.
4. Government Financial Assistance
You can also request for a government financial assistance if you and your family are having a rough time financially. One reliable scheme is ComCare Interim Assistance. Through this scheme, you may receive cash, vouchers, and food rations that will help you through these tough period.
Other Things To Know About Personal Loan
1. Can a Personal Loan be Reversed?
Yes, but only while you have not yet received the loan funds. Otherwise, it would not be possible to cancel an approved loan. Make sure to think it over a lot of times if you are unsure of your decision to prevent further problems.
2. Can you Modify a Personal Loan?
Banks may strictly implement their loan and repayment terms. However, other banks may be open to negotiations where, borrowers who are struggling to pay their loans may request a new repayment schedule.
3. Can a Personal Loan Affect your Credit?
Yes. Like other types of loans, a personal loan will affect your credit. Make sure to avoid getting unnecessary loans to get quick access to them when the need comes.
Read Also: HDB Bridging Loan Property Upgrade
Closing
With the inevitable growing expenses, borrowing money from family, friends, banks, government programs, and other financial institutions becomes a cruicial part of life, and personal loans in particular could be a huge help for your financial growth.
Although these loans come in handy for any financial emergency, borrowing should involve deep sense of responsibility. Further, it is best to avoid financial mistakes by knowing the unhealthy financial practices to prevent future troubles that might put your financial health at a greater risk.
Key Takeaways
- Improving your financial habits is essential when you plan to get a personal loan in the future.
- Once you get approved for a loan, spend enough time to read through the loan agreement.
- Always borrow within your needs and use your personal loan for essential expenses.
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