To borrow money means to have a huge responsibility on your shoulders.
If you don’t have a strategy in place for how you are going to repay the amount with the interest then you can risk a lot.
Borrowing is a science in itself. As such, it has certain rules and best practices that you should know about. Read this article in its entirety to fully understand the science of borrowing and the ramifications involved.
Let’s first start from the very basics.
What is borrowing?
Borrowing means acquiring finances from legitimate sources. In return for lending you money, the lender charges interest on the amount (called the principal amount). For example, suppose you borrow S$8,000 and the lender is charging you a 10% interest rate. When you finally end up repaying this loan, you would have paid S$8,800 in total.
Here are three key aspects to a loan:
1. Principal amount: The amount that the lender loans to you.
2. Interest: It’s the extra amount you will be paying to the lender, sort of as a charge for their service to lend you money when you need it. The interest is calculated on the principal amount.
3. Repayment term: This is by when you have to repay the loan. It differs from institution to institution and from lender to lender. Some give you a grace period of a few months after which you have to make a monthly repayment, like an EMI.
Here’s an example:
Assume you have to borrow S$8,000. The interest rate is 10% and the repayment term is 1 year. Now, this means that you’d be paying S$8,800 in 12 months, which is an average of S$733 per month – your monthly EMI to repay the principal amount along with the interest.
If you’re certain that you need a loan, you can read more about various credit solutions here.
What are the best practices of borrowing?
Don’t borrow money without knowing the ins and outs of borrowing. There are plenty of ways to get yourself trapped inside a never-ending cycle of debt. As they say, it’s better to be safe than sorry.
But don’t worry. Helping you is precisely what we are here for. Here’s what you should keep in mind:
- The amount should not be more than what you can afford to pay back. No matter what happens, don’t overborrow just because you can. You’re not getting free money. The amount will need to be repaid along with an interest. The higher the amount, the higher will its interest be. Make a logical deduction as to what amount you can comfortably repay in the given time period and only borrow that much because you already have to pay interest on it.
- Read the agreement from start to finish. Do not skip a single word. Read all the fine print. Get it reviewed by someone qualified, if possible. There are many ways to trap a loanee. Don’t be a victim.
- Ask for a detailed schedule of repayment. Calculate the schedule on your end as well. If there’s any discrepancy in the schedule or if you’re being charged incorrectly in the future then it would do plenty of good to fix the problem when you still can.
- Shorter loans help you save more. A 5-year loan with the same principal amount and interest rate will help you save a considerable amount of money in repayments and interest than a 7-year one, for example. The monthly payment will be higher but the number of total payments will be remarkably low.
- There are also floating-rate loans. The interest rate in this case isn’t frozen and can fluctuate. Floating-rate loans generally provide more convenience but at the cost of some uncertainty or even risk under some circumstances. If you are going for one of these then make sure that you have factored in the possible increase in the interest rate. Even a 1% or 2% jump can increase the total interest you pay by a lot.
It’s not hard to get all the details of a loan. Make sure that you have the information under your belt and that it’s perfect before you move ahead.
When should you be taking a loan?
These are the three most popular reasons for people taking loans:
1. Making a big purchase.
It can be a car, a house, or something else. These are typically basic requirements or an upgrade over your existing assets. This is a perfectly justifiable cause for a loan.
2. Unexpected and unforeseen events such as medical needs and financial emergencies.
In this case, one has to be sure of future finances and have a steady cash flow in the future to repay the loan.
3. People also take loans because they are compulsive spenders.
Just to maintain a particular lifestyle, it becomes important to have a lot of cash. They can indeed justify the loan’s cause but in general, it mostly boils down to the nature of overspending, avoidable expenses, or impulse buying. You should not take a loan in this case.
What are the best sources to borrow money from?
There are only a couple of sources you should place your trust in. Financial institutions such as banks and licensed moneylenders. Both have pretty specific terms.
Direct Financial offers a personalised search system that helps you find the best personal loans in Singapore.
Do understand that licensed moneylenders are not loan sharks. They are just private financial institutions.
They also don’t try to dupe people. They are also regulated by authorities so in the case of any wrongdoing you can be sure that the government has your back.
Financial institutions
There are many banks and finance companies to choose from. All come with their own perks and rates. You can check the directory of financial institutions in Singapore to make up your mind. All these companies and banks are licensed by the Monetary Authority of Singapore so you can borrow from them without a shred of a doubt.
At the time of writing, there are:
- 4 local banks,
- 96 wholesale banks,
- 1 money broker,
- 10 qualifying full banks,
- 20 merchant banks,
- 37 representative offices for banks,
- 20 full banks,
- 3 finance companies, and
- 1 financial holding company.
All of them can be used to borrow money.
Licensed moneylenders in Singapore
Singapore’s Insolvency and Public Trustee’s Office (IPTO) has a division called the Registry of Moneylenders. They have a full list of licensed moneylenders. Also, make sure that the moneylender complies with all the laws. The laws of money lending are for the borrower’s security. These have provisions for the interest rates, late payment fees, etc. Make sure you understand these laws as well.
Avoiding loan sharks and unlicensed moneylenders
You will find lower interest rates, fewer documentation requirements, and quite possibly, longer repayment terms also with unlicensed moneylenders or loan sharks.
Avoid dealing with these because in case you fail your repayments they can harass or harm you and your family. They are also not bound by any laws or regulated by authorities.
Here’s what you should know before you apply for a personal loan
Make sure you know how much you need. Be as specific as possible. As mentioned, a loan is not to be seen as free money. Even if you qualify for a bigger loan, avoid borrowing more than you need by adding more needs to the list. Loans are not for convenience but for getting out of a tricky spot.
Be realistic and take stock of your current financial standing. Set aside your savings and factor in all your bills. Also, keep an emergency fund aside. You need to have savings enough to cover 3-4 months of your expenses. Take note that expenses generally increase over time.
Assuming you’re sure that you can afford the repayments comfortably, you can now approach a financial institution or a licensed moneylender to borrow the money.
What happens after you have borrowed? What should you do?
You are effectively in debt the moment your loan is sanctioned. Your work is still far from being finished. Ideally, your priority should now shift to getting out of debt.
After you have borrowed the money there are still things to do to make sure you have the smoothest possible experience in getting out of debt.
- Avoid late payments. Late payments come with penalties and fees.
- If you have extra savings or spare cash, keep it aside specifically for repayments. Repay more than you initially planned to in this case.
- Keep a good track of your debts. Monitoring your remaining debt and how much you have left to work with is a great idea to keep your debt in check.
- Multiple loans should be avoided at all costs. Loans work best one at a time. Your focus will be spread too thin and it’s likely that you’ll fall short of repaying some of the loans. It also affects you psychologically and mentally.
Only apply for a loan when you have a repayment plan in mind.
For students, getting a student loan helps them increase their skillset and command a higher salary. For homeowners, getting a home renovation loan can help them improve their standard of living.
If you are in a rush to get a loan, get a quote for free now.
