Let's get personal.
As taking personal loans from banks has become an increasingly common practice in Singapore, talks on improving credit score and scouting for banks with the best interest rates also seem to be on everyone's lips.
Whether you're looking to tide over a difficult time or to give yourself a boost in achieving your financial goals, here are five pro tips to ease your personal loans journey.
1. Consider the other upcoming major loans
Steer clear of personal loans two to three months before you take out a major loan, such as to buy a car, house, etc. The only exception is an HDB loan (explained below).
When you take a bank loan for a car or house, a key factor is your DSR (Debt Servicing Ratio). This measures what percentage of your income can go into repaying the housing or car loan, including other overheads (e.g. repayment for other personal loans).
So the current total DSR of 55 per cent means your loan repayments, plus repayments of any other loans you have, can't exceed 55 per cent of your income.
So the more personal loans you pile on, the smaller the housing or car loan you'll qualify for. If you stack personal loans like you're setting up a Jenga game, you might qualify for nothing.
Just for reference, most banks allow 40 per cent DSR for a housing loan, and 30 per cent DSR for a car loan.
If you absolutely must take a personal loan before a housing or car loan (say to cover the down payment), the timing gets tricky. Mortgage specialists from MoneySmart can help you find out what's the best home loan in Singapore for you.
The HDB loan exception
HDB loans are a breed apart. These have a 30 per cent MSR (Mortgage Servicing Ratio) cap.
That means your HDB loan repayments can't exceed 30 per cent of your income, without taking into consideration other loan repayments. So your personal loans won't impact a HDB loan as much as a bank loan.
2. Get specific alternatives
When it comes to getting loans, be as specific as you can. Don't take a personal loan to renovate your house when there are renovation loan packages. Likewise, don't take a personal loan to pay for your education, when there are education loan packages.
In order to encourage you, specific loan packages often have lower interest rates.
Personal loans tend to charge interest of about 3 per cent to 7 per cent, whereas specific loans (renovation loans, education loans, etc) have rates as low as 0 per cent (usually comes with higher processing fees). Ask the banker to match a package to your needs.
Consider it a discount for giving your bank the peace of mind that you're not funnelling the cash into a crack habit.
3. Shop and compare extensively
Personal loan interest rates can change faster than a 13 year old's mood. So just because Aunt Sue got the best loan from Bank X three months ago, that doesn't mean you should go to the same bank. Nor should you immediately go to your current bank.
See, banks make money from charging interest. So when no one's borrowing from them, they get a bit desperate. They lower interest rates, give more lenient repayment terms, give out free luggage, etc.
So as a borrower, you want to find the bank that's low on clients at the time. Think of it as a reverse "employee of the month". You want to be served by the reject, not the star, because they're so desperate they might give you better rates. Or better rewards.
4. Check the penalties
Almost nobody checks late payment penalties, because almost nobody intends to pay late. But it's part of knowing what you're getting into; like checking the interest rates, or checking for a better offer.
Like credit cards, it's not impossible to get an "interest adjustment" for just one late payment. Mess up once, and your 8 per cent interest might become 9 to 10 per cent from then on. Late fees can also be substantial.
Besides interest, fees and probably children's souls are another source of a bank's income. So don't assume it'll be the same as a $50 credit card late fee; the penalty might be much steeper.
When two banks are offering about the same rates, penalties can be the deciding factor. So pick the lowest interest rates first. And in case of a tie, pick the bank with more relaxed penalties.
5. Pick the right time to take it on
When taking personal loans, you've got to be strategic. It is usually better to take out personal loans during inflation instead of an economic boom.
Why? As the value of cash is declining during a period of inflation, you'll actually be making repayments with money that is worth less prior to the inflation period.
And if you've already signed up for a personal loan with a bank before the inflation began, it is even better than taking out a personal loan in the midst of the inflation season, because you'll end up having more money in your paycheque to pay off the debt although you're technically owing the same amount of money.
ALSO READ: 5 foolproof ways to improve your credit score
This article was first published in MoneySmart.