A loan is a debt instrument that any individual or entity can utilize to finance a venture. It is the practice of borrowing a certain amount and eventually repaying it along with interest charged. There are various kinds of loans, and each one has its terms, uses, eligibility criteria, interest rates, and risk and payback period.
What is a Personal Loan?
Simply put, a personal loan is a defined as debt taken out for personal reasons. Unlike home loans, car loans, education loans, etc., these types of loans do not require the borrower to specify the reason for borrowing the loan amount. Personal loans are extremely helpful when you need financial assistance for miscellaneous expenses, such as financing a venture, consolidating your debt, repairing your home, funding a wedding or vacation and so forth. Singapore offers many different institutions that give out loans, including commercial banks, credit unions or agencies, licenced money lenders as well as non-banking financial companies (also known as NBFCs).
An interest amount denoted as a percentage of the original amount which is usually paid and the principal sum of money. Personal loans, specifically, are a modality that can be repaid in instalments. This is both a good and a bad thing – the positive side is that the entire lump sum need not be repaid altogether, thereby reducing the borrower’s stress. In contrast, the negative side is that a higher rate of interest usually accompanies instalment debt. You must fall within the age bracket of 21 to 65 years in Singapore to be eligible for a personal loan. Further, specific stipulations on monthly income and credit history also exist, but they tend to change from lender to lender. Also, it is noteworthy that for licensed money lenders in Singapore, interest rates can vary from those of commercial banks.
Here are some common reasons for which people take personal loans:
- Sudden emergency expenditures which had not been anticipated.
- Medical bills or hospital costs that are not covered by health insurance.
- Consolidating their debt.
- Repairing homes, office buildings and other establishments.
- Financing holidays or weddings.
- Buying machinery for expansion of a business.
- Obtaining capital to begin a new venture.
- Covering funeral costs.
Benefits of taking a personal loan
Given below are some of the many benefits associated with taking out a personal loan:
- All loans contribute towards the creation of cash flow for both individuals and organizations. This cash flow is very valuable if the borrowing candidate wishes to begin a new business venture, pay tuition fees or medical bills, etc. A solid cash flow system also helps strengthen the credit score of the candidate.
- Loans are a great way to finance the growth of a pre-existing business. If you find that your venture is on an upward growth trajectory and enjoys economies of scale, this may be an excellent time to take a loan to support this expansion process. It will be easy to repay the loan amount using the added profits from your venture.
- Loans are an excellent way to add flexibility to the capital structure of your business. Since various lenders offer many different loan packages, each of which has its own set of terms, interest rates, and payback periods, it helps business owners have a pre-decided loan package to know exactly how much they need to repay on the due date.
Interest rates are an essential consideration during the process of taking a loan. In the next section, we shall explore the meaning and implications behind the interest rates of personal loans in Singapore.
What is an interest rate?
Interest rates can be viewed as the cost of debt finance or the cost associated with borrowing a sum of money. Since the lender is offering cash to the borrower, the lender is eligible for some compensation for the loss of that money for the given period. This compensation takes the form of an interest rate, a specific rate of the principal value that the borrower needs to repay along with the principal on the due date. Conversely, had the lender kept his money in a fixed deposit instead of lending it to the borrower, he would have earned a particular interest amount. The interest rate associated with the loan is usually higher than the fixed deposit rate.
Personal loans usually tend to use compound interest, which means interest is charged on the amount due at the end of each time period and not just on the original principal value. Interest rates are usually computed on a per annum or yearly basis, but there are also instances where the rate is compounded semi-annually or quarterly. For example, if the rate per annum is 8%, the rate will be 4% when it is compounded semi-annually.
Personal Loan Interest Rate in Singapore
Personal loan interest rates in Singapore vary depending upon the lender in question, but the range of interest rates is around 3% to 6%. The rates change based on the payback period as well. Overall, the interest rates associated with personal loans tend to vary from other loan types since the borrower is not required to disclose the reason for which the loan is being taken; this makes personal loans slightly riskier for banks, and they adjust the interest rates of their loan packages in accordance with this consideration.
Overall, many individuals find themselves needing personal loans for various reasons during their lives, and interest rates are significant to understand, such that the borrower is capable of making an informed decision while choosing from the different personal loans options available with banks, private lenders, non-banking financial companies and so forth. Interest rates are the cost of borrowing. Loans, unlike equity are a part of external debt, which means they must be repaid first. Hence, borrowers must understand precisely how much they shall be due to pay over and above the original lump sum amount and whether that amount is acceptable to them before they enter into a loan agreement.
