What’s a Personal Loan, Anyway?

In today’s fast-paced world, Singaporeans often need extra funds for various expenses—be it home renovations, weddings, or unexpected medical bills. This is where personal loans can help. But what exactly is a personal loan? How does it work, and when should you consider taking one?

Here’s a quick guide to personal loans.

What is a Personal Loan?

A personal loan is a type of unsecured borrowing offered by banks and licensed financial institutions. 

Unlike secured loans, personal loans don’t require you to provide collateral—such as a car or property—as security. Instead, approval is based on factors like your creditworthiness and income. Once approved, you receive a lump sum of money to use as needed, with the agreement to repay it, plus interest, over a fixed period. This flexibility makes personal loans a popular choice for many Singaporeans.

Types of Personal Loans in Singapore

Financial institutions in Singapore offer a range of personal loans tailored to different needs and financial situations. Here’s a look at the main types of personal loans available:

Term Personal Loans

Term personal loans are the most common type of loans offered by banks and financial institutions in Singapore. These loans provide a fixed amount of money that borrowers repay over a set period, typically ranging from one to seven years. The repayment structure usually involves fixed monthly instalments, making it easier for borrowers to budget and plan their finances.

Key features include:

• Fixed interest rates for the duration of the loan
• Predetermined repayment schedule
• Longer loan tenures compared to other personal loan types
• Suitable for large expenses or long-term financial planning
  

Term personal loans are ideal for individuals who need a substantial amount of money and prefer a structured repayment plan. They're often used for major expenses like home renovations, wedding costs, or debt consolidation.

Revolving Personal Loans

Revolving personal loans, also known as personal lines of credit, offer more flexibility than term loans. With this type of loan, borrowers are given a credit limit from which they can draw funds as needed. Interest is only charged on the amount used, and borrowers can repay and redraw funds multiple times within the approved limit.

Key features include:

• Variable interest rates that may fluctuate based on market conditions
• Flexible repayment options, with minimum monthly payments required
• Ongoing access to funds as long as the account remains in good standing
• Ideal for managing cash flow or covering unexpected expenses

Revolving personal loans are particularly useful for individuals who need ongoing access to funds or prefer more control over their borrowing. They're often used for managing irregular income streams or as a financial safety net.

Balance Transfer Loans

Balance transfer loans are a specialised type of personal loan designed to help borrowers consolidate high-interest debts. These loans allow individuals to transfer outstanding balances from credit cards or other high-interest loans to a new loan with a lower interest rate. 

Key features include:

• Low or 0% interest rates for an introductory period
• Potential for significant interest savings on existing debts
• Fixed repayment terms after the introductory period ends
• Useful for managing multiple debts and reducing overall interest costs

Balance transfer loans can be an effective tool for individuals looking to streamline their debt repayment and potentially save money on interest charges. However, it's crucial to carefully consider the terms and conditions, especially after the introductory period.

Debt Consolidation Plans

Debt consolidation plans (DCPs) are a specific type of personal loan designed for individuals struggling with multiple unsecured debts. These plans allow borrowers to combine various outstanding balances into a single loan with a potentially lower interest rate and more manageable repayment terms. Key features include:

• Consolidation of multiple unsecured debts into one loan
• Rates may depend on creditworthiness but usually higher than credit card interest rates
• Repayment process usually repaid over a long period of time
• Often include debt management support and financial counselling

DCPs can be beneficial for individuals overwhelmed by multiple debt obligations and seeking a more structured approach to debt repayment. However, they typically come with strict eligibility criteria and may require closing existing credit facilities. 

To learn more about dealing with debt consolidation plans, read our more in-depth article here.

Tips for a Successful Application

To increase your chances of loan approval and secure favourable terms:

• Check and improve your credit score before applying
• Ensure all information provided is accurate and up-to-date
• Apply for a loan amount that you can comfortably repay
• Consider applying with a bank where you have an existing relationship
• Avoid making multiple loan applications simultaneously, as this can negatively impact your credit score

By understanding the eligibility criteria and preparing thoroughly for the application process, you can navigate the personal loan landscape in Singapore more effectively. 

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