When we are not borrowing money from family and friends, the thought of a contract, penalties, terms and conditions, and fine print can start to seem overwhelming. In fact, it can actually be scary if you borrow money from the wrong kinds of people, specifically the ominous loan sharks. Here are 6 ways to borrow money safely and pay it back successfully.
Tip 1: Identify the Right Loan for You
Taking out a loan is a big decision. First, determine the purpose of the loan, how much you need, and how fast you need it. Personal loans are the most common option and are ideal for unexpected expenses or when you are strapped for cash to pay some bills.
However, if you are looking for a loan on a car, house, education or tuition, house renovation, or debt consolidation, there is a special loan for that. Loans with a specific purpose may actually save you some money because banks tend to offer a lower interest rate. For example, a personal loan with no general purpose may receive an interest rate of 7%, whereas a home renovation loan or an education loan may have an interest rate of 2%. One additional factor is how fast you need access to your lump sum. Most personal loans from a bank may take about 5 business days to release the funds into your account. However, moneylenders have a faster approval process and can even approve a loan within 24 hours or less!
Tip 2: Calculate your monthly budget
Now that you know what you need, you will need to calculate what you can actually afford. When you know how much you can manage to pay back every month, you will be able to calculate the shortest loan tenure. The shorter your loan tenure is, the less interest you pay overall. Don’t get sucked into a lower monthly payment. This may make the loan seem more affordable, but it actually just extends how long you are in debt. The longer you are in debt, the more expensive the loan actually is. Look beyond the low monthly payment and focus on your budget and what you can actually afford to pay back every month. Use an online loan calculator to help you estimate the best monthly installment for your situation.
Tip 3: Check Your Credit Rating
There are two main ways to get a loan in Singapore: a bank or a money lender. Your credit rating is one important factor that will determine from whom you can borrow money from. A bank is better for people with good to excellent credit. Of course, you will be required to produce other documents and fulfill other requirements, such as proof of address and income, before a bank will consider giving you a loan. On the other hand, a money lender is better for people with less than perfect credit. In fact, they do not look at your credit rating at all, but rather use data from the Moneylender Credit Bureau. This gives them information about your creditworthiness based on your previous history with other licensed moneylenders. In general, moneylenders have an easier approval process than a bank.
Tip 4: Choose A Lender
Now that you know what you are looking for, you can get quotes from different lenders. The most important aspect of any loan agreement is the interest rate. This is how much profit the lender takes from your loan. In general, banks will have lower interest rates and moneylenders will have higher interest rates because they tend to approve higher risk borrowers. However, be sure to use a licensed moneylender. This means that they have been approved by the Ministry of Law (MinLaw) and have a registration number issued by the Monetary Authority of Singapore (MAS). Under the Moneylenders Act and Rules Singapore, licensed moneylenders must abide by regulations set forth by authorities in Singapore that protect the borrower. For example, it is against the law to threaten the borrower or his family either in person, in writing, or by phone with the goal of intimidating the borrower into paying. They must also maintain the confidentiality of the borrower. This means that you are protected from harassment and embarrassment if you miss a payment.
It is essential that you understand the terms and conditions of your loan. This includes all fees and penalties associated with your loan as well. For example, be sure to ask about late payment fees, early settlement fees, and any varying interest rates.
Tip 5: Know What To Do If You Can’t Afford The Monthly Payment
If you miss a few payments, you can bet that your lender will be in touch. However, simply ignoring these warnings is not a good idea. First, know your late payment penalty. Some banks will charge a flat fee, while others may charge a percentage of the outstanding balance and/or raise your interest rate.
Second, if you can’t get back on track with your payments, be sure to contact your lender. Some banks, like HSBC, may have banking services to help you through financial difficulty. For example, they may provide some type of temporary relief from repayments and restructure your loan. Remember, your lender wants their money back. Most will be willing to work with you and make a few concessions, such as a lower interest rate, if it means that you can continue to make payments on your loan instead of defaulting and declaring bankruptcy.
Tip 6: Reevaluate Your Spending Habits
When you need to take out a loan and borrow money from a bank or moneylender, it may be time to reevaluate your spending habits. Of course, sometimes unexpected expenses may arise that are out of your hands. However, it is advisable to have an emergency fund for such an occasion by living within your means. In other words, even if you can afford something, it doesn’t mean you need to purchase it. In fact, living below your means will allow you to put some money away for a rainy day. Having a bit of savings can be the difference between taking out a loan, which increases your risk of being caught up in a debt cycle, or staying out of debt completely.
Borrowing money can be useful if you are in a temporary financial pickle. However, this requires careful consideration. Be sure to know the loan’s purpose, the loan amount, how soon you need it, and how much you can afford to repay every month. When choosing a lender, always select a reputable bank or a licensed moneylender. Know all the terms and conditions of your contract as well as the fine print. Pay off your debts as soon as possible to save on interest to get back on your financial feet sooner. Borrow safely. Borrow responsibly. Get out of debt successfully.