So, let me guess, you’ve just started working (or you might be a student on a student loan) and you’re thinking about what type of loans you can take up. This can be in the form of credit card loans or even housing loans (for those of you who are looking to buy your first HDB or condominium). Well, fret not, this article seeks to help you figure out what types of loans are suitable for you and whether you should take the risk of potentially not being able to pay them back!
photo made with love by Dev Dodia with OOWA
1. Credit Card Loans
When you apply for a credit card, the bank will give you a maximum credit limit. You are able to set your credit limit up to that point (e.g. $10,000) or anything below that. This essentially means that on a monthly basis, you can pay for things you buy using that credit card up to that amount before your overdraft. Over drafting means that you exceeded your credit and will have to pay interest for it. Here are some of the benefits and cons of applying for a credit card:
Credit card pros
- You don’t have to carry cash around and it’s generally safer that way as you can simply cancel your card should it get stolen
- Building up your credit score will be useful when making applications for other loans
- Having a credit card statement instead of cash allows you to properly track your expenses
Credit card cons
- You can easily overspend if you do not manage your spending well. With a simple swipe of your card, it is easy to forget just how many products you have bought.
- Interest rates can easily compound if you do not have enough to pay for your debts, causing you to fall further in debt.
2. Home Loans
Before even considering a loan, you need to consider what you can afford. It is not wise to take up a loan when you will be unable to pay it off in the long run. It is therefore imperative that you first make some calculations and sums to ensure that this does not happen. There are different mortgage packages that you will be able to choose from. We will discuss three of the most common ones that Singaporeans tend to take.
3. Capital and interest mortgage
This is one of the most common forms of mortgages. Monthly payments used to pay both the interest and principal amounts. Every monthly payment is equal (e.g. $1000). In the initial years of the loan, a larger portion of the monthly payments is to pay for the interest payments (e.g. $800 for interest and $200 for principal). Over time, the principal payment portion will become larger (e.g. $800 for principal and $200 for interest some time in the future) and eventually the debt would have been fully repaid.
4. Fixed interest rate
Fixed interest rate mortgages offer a fixed interest rate for a period of time. Afterwards, it becomes a variable interest rate. One bad thing for those who prefer fixed interest rate schemes, fixed rate packages in Singapore tend to only be offered up to a 3-year period, unlike countries which offer them up to 20 to 30 years. After 3 years, homeowners can consider refinancing depending on the situation of the economy as they may get a better rate with variable interest rate schemes.
5. Variable interest rate
In a variable interest rate loan, the interest rate fluctuates during the loan period. Usually the interest rate is calculated based on SIBOR (Singapore Interbank Offered Rate), which refers to the rate at which banks lend money to one another. Depending on which SIBOR rate you take up a loan on, the interest rate can vary (and be adjusted) every 3 to 12 months. The bank usually gives a one-month notice to the borrower.
6. Secured & Unsecured Loans
Secured loan – A borrower providing assets as collateral to make a loan from the bank. Examples of assets could be a house, a car or anything else of sufficient value. When the value of the collateral falls below a certain amount, the lender may request that the borrower top up. If the borrower is no longer able to pay for their loan, the lender has the right to sell the collateral provided to recover the money owed. When the money from the sale is insufficient to cover the total amount owed, the borrower will have to pay the remainder.
Unsecured loan – A borrower is not required to provide any form of collateral to the lender for borrowing money. However, due to the increased risk of default, interest rates for such loans tend to be higher.
|Examples||Revolving (not fixed)||Term (fixed)|
By agreeing to be someone’s guarantor, one is basically agreeing to pay off his/her debt from them if they are unable to do so. To be someone’s guarantor is a serious matter, and must be deeply considered before coming to an agreement.
Before one agrees to be a guarantor, they must consider whether they have the ability to pay off their guarantee’s debt in case of default. It is imperative to consider why the guarantee has to borrow, and how long of a loan period they would like to take from you. If you are unsure, you can always seek legal advice before agreeing to this.
8. Car Loans
For most Singaporeans looking to buy a car, they tend to require a car loan since they will not be able to provide liquid cash at the point of purchase. So, if you have come looking to understand car loans, you’ve come to the right place.
Documents required: (General guideline – you may need more)
- Proof of income
- Notice of assessment from IRAS
How much can I borrow?
- For cars up to an OMV of $20,000 – down payment of 40% required
- For cars with an OMV of >$20,000 – down payment of 50% required
For example, if a car has an OMV <$20,000 with a selling price of $100,000, you need at least $40,000 in cash for downpayment.
If a car has an OMV > $20,000 with a selling price of $150,000, you need at least $75,000 cash for a downpayment.
It definitely helps to have a clean credit history. This will allow for banks to process your loan easier as they know that you will be able to repay them. Also, if you have other ongoing loans, the bank will be able to easily find out and this will affect your chances of borrowing for sure.
So what do all these loans mean?
Basically, when you are taking a loan, understand that it is necessary for you to set aside enough liquidity to pay for your other expenses e.g. children’s education, monthly food expenses etc. Also, loans tend to be a long term commitment so they need to be carefully thought out. Certain loans will have penalties when dropped early.
Also, for certain things such as cars, it may be wise to consider buying only when you are financially stable, especially in Singapore where car prices depreciate greatly over time. Selecting a house and car that are within your means will keep you and your wallet happy over time.