Personal loans can be a helpful tool, but only if used wisely. Before committing to a personal loan, here’s what to weigh before stepping up to the plate.
Establish a clear rationale
Although personal loans can be used for almost any purpose, with great power comes great responsibility. You’re borrowing a substantial sum, and this amount shouldn’t be taken lightly or used on a whim. As a prospective borrower, it’s pertinent that you have a defined reason for taking the loan and a solid repayment plan to boot.
Otherwise, as the adage goes, “you fail to plan, you plan to fail”. A poorly considered loan could lead to greater financial strain and a deeper debt spiral.
Interest rates
There are two terms when it comes to interest rates: Applied Rate (AR) and Effective Interest Rate (EIR).
AR refers to the flat monthly rate charged by money lenders. Do note that AR is “applied” on the remaining principal balance, not the original loan amount. Hence, it doesn’t account for the compounding effect or reducing balance over time, AKA the true cost of borrowing over time. Furthermore, under the Moneylenders Act, the AR is legalled capped at 4% per month, which adds up to a staggering 48% p.a. if taken at face value.
To illustrate, imagine you borrow $10,000 at 4% per month for a tenure of 12 months. This means you’ll pay a 4% interest on the outstanding balance each month.
In contrast, EIR refers to the true annual cost of the loan. It accounts for compounding interest, loan tenure, repayment frequency, and additional fees like processing or late payment charges. This results in EIR more accurately reflecting the real cost of the loan borne by the borrower.
Using the above example, your loan’s AR is 4% per month with a monthly repayment of about $1,065.52. However, the EIR also roughly translates to 48% p.a., which is a very high cost compared to traditional bank loans. This may climb even further if other fees and charges apply, which brings us to our next point.
Fees and charges
We can’t talk about personal loans without addressing their peripheral fees and charges. Like most financial products, personal loans come with their own set of pesky fees that borrowers should be aware of.
Common charges include processing fees and late payment charges. The former is capped at 10% of the loan principal amount while late payment charges range between $60 to $100 depending on the lender. While these charges may seem minor, they can quickly add up if not managed carefully.
Minimum & maximum loan amount
Each personal loan comes with their respective minimum loan amounts and maximum loan limits. For unsecured loans, these limits are typically tied to the borrower’s annual income. According to MAS, the legal borrowing limit for unsecured credit is up to 6 times your monthly income.
So for example, if your monthly salary is $5,000, you can potentially borrow up to $30,000 since it’s 6 times your monthly salary.
Borrowing limits by income| Minimum annual income | Singapore citizens / PRs | Foreigners residing in Singapore |
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| < $10,000 | $3,000 | $500 |
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| $10,000 ≤ x < $20,000 | $3,000 | $3,000 |
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| ≥ $20,000 | 6x monthly income | 6x monthly income |
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Approval rate & loan disbursement
Bank loans typically take a few working days to approve due to more stringent document verification. In contrast, loans from money lenders require less paperwork and therefore, tend to be approved faster within 24 hours, if possible.
Meanwhile, funds disbursements can happen within the same day too. In fact, some lenders even provide loan approvals in under an hour, allowing quick access to money during emergencies.
Impact on credit card limit & credit score
Taking up a personal loan can reduce your available credit card limit by the loan amount, and by extension, impact your credit score. Essentially, the bank is lending you a portion of your credit limit as your loan, therefore the obligation falls on the borrower to repay both the outstanding loan and credit card balances.
How this affects your credit score in the long run depends on how responsible you are with your repayments. Consistent and timely repayments can actually improve your credit score over time. However, frequently overdue repayments or early defaults will be detrimental to your credit score and signal higher credit risk to future lenders.
Repay on time to avoid penalties
Licensed lenders can charge up to $60 per month in late fees, plus late interest of up to 4% per month of the overdue amount. Missing payments also hurts your credit report. Set reminders, automate payments where possible, and prioritise loan instalments to avoid compounding costs.
Compare multiple lenders before signing
Even among licensed money lenders, interest rates, fees, and approval speeds differ. One lender may be better for salaried employees, another for freelancers or foreigners. Always compare at least three options side by side. Use MoneySmart’s personal loan comparison tool to find your best fit.
Avoid unlicensed money lenders
Many might have the misconception that money lenders are unsafe because loan sharks often disguise themselves as “fast loan providers” online. They harass, overcharge, or even threaten borrowers. Protect yourself by borrowing only from lenders listed on the Ministry of Law Registry of Money Lenders. If a deal seems too good to be true, it probably is.
