7 Questions to Ask Yourself before Getting a Loan
People in Singapore are taking loans in order to accomplish different goals. There are many reasons why people apply for personal loans. For example, a person may want funds to cater for an emergency such as clearing a medical bill. Many students in Singapore apply for loans in order to fund their college or university education. There are also people who apply for loans to expand their businesses, to carry out home improvement projects, to buy homes, or to purchase motor vehicles. These are just but a few examples of the reasons that make people go for personal loans. Prior to applying for a loan, it is important for people to ask themselves a number of questions.
1. Whether the person qualifies for a loan
Before even thinking about getting a loan from a lender such as a bank, it is important for people to ask themselves whether they qualify for the loans that are provided by lending institutions. For example, banks in Singapore consider factors such as whether a person has a regular source of income, a person’s credit rating, and whether the person can afford the loan. Banks generally avoid people who are deemed to be too risky to lend money to. In other words, if a lending institution has the view that it will be too difficult for a potential borrower to repay the money that is lent to them plus the accrued interest, they will avoid extending a loan to such a person. On the other hand, it is relatively easy for people who have a strong credit rating to be given loans. It is because of these reasons that people have to ask themselves whether they actually qualify for the loans that they intend to apply for.
2. Reason for borrowing and how much money is actually needed
It is important to have a concrete reason for applying for a loan. Banks will normally lend money to people who understand their needs and what to do with the borrowed money. It is also important to determine the amount that one actually needs. Having a concrete reason for borrowing and knowing the amount that is required are things that can be used to point out how the borrowed money will be used. When going for a business loan for example, it is important for the borrower to have a realistic cash flow projection. This will enable the lender to have confidence in the borrower. Where the cash flow projection is determined by the bank to be lower or higher than the amount required by the borrower, the lender is likely to be cautious about giving out the required loan.
3. Whether the loan is affordable and the repayment plan is feasible
After determining whether one qualifies for a loan and the reason for which money is to be borrowed, it is important to ask whether the loan facility that is available is affordable. Affordability is a vital component of financial management. In this regard, it is important for people to apply for loans that they can comfortably repay. Just as it is important to have a feasible budget when making plans regarding finances, it is important to plan on how to pay off a given loan. And this begins by ensuring that the loan that an individual intends to go for is affordable. The loan should be affordable such that it can be repaid comfortably and without putting a strain on a person’s other budget needs such as paying rent, paying for other utilities, buying groceries, and putting aside some money as savings.
In order to find an answer regarding whether a loan is affordable, it is important to evaluate one’s financial position and compare different types of loans that are offered by different lenders.
4. The type of loan: Whether secured or unsecured
Banks in Singapore typically offer two kinds of loans; secured loans as well as unsecured loans. When it comes to a secured loan the borrower is required to pledge a given asset (such as property or a car) as a guarantee for the loan. In this case, the loan becomes a secured debt, meaning that the lender can acquire the pledged asset in case a borrower defaults in making payments for the loan. On the other hand, an unsecured loan is a loan that is approved without the borrower having to pledge collateral.
Generally, secured loans allow borrowers to get bigger loan amounts because of the guarantee that the borrower will be able to repay the loan in one way or another. Secured loans are also associated with lower interest rates compared to unsecured loans. In contrast, unsecured loans are usually smaller loan amounts with higher interest rates.
5. The interest rate and processing fees charged by the lender
Differed types of loan products have different interest rates. Also, different banks have different rates for the loans that they offer. It is worthwhile to go for a loan whose interest rate is affordable, meaning that one can repay the loan plus the interest amount comfortably over the stated period.
The interest rate that is charged on different loan products in Singapore is influenced by a number of factors. These factors include the cost of funds (the determinant of the prevailing interest rate of the market), the cash rate that is stipulated by the Monetary Authority of Singapore (Singapore’s central bank), the type of loan, and the terms of each type of loan.
It is important to compare the interest rates and loan processing fees that are charged by different banks in order to determine the lender that offers the most competitive rate for the loan that is required.
6. Whether the loan has flexible terms
A good loan is one that has flexible terms. A flexible loan offers the borrower more control over how to make repayments. For instance, if a person is applying for a student loan, the lender should be in position to provide a considerable grace period to allow the student adequate time to get a job and settle after completing their education. In addition, the loan terms should make it possible for the borrower to repay the loan earlier than stipulated if the borrower has the capacity to do so. As well, the loan should not have punitive conditions in case the borrower experiences problems such as emergencies or income fluctuations, which could affect the original loan repayment plan. The more the borrower is able to negotiate the loans terms, the better.
7. The period over which the loan is to be repaid
Once all the above questions have been answered, it is important to ask about the period over which the loan will be repaid – what is referred to as the loan tenure. Whereas most personal loans have tenures that begin with 12 months, it is important to go for the most appropriate loan period. A very long loan repayment period will cause a reduction in the amount of instalment that should be paid but will also lead to a larger amount being repaid as interest over the loan period. Shorter loan periods mean a lower amount of interest but are also associated with bigger instalment amounts. A borrower should choose a loan tenure that is best suited for their needs.