Simple Loan – Financial planning | Debt Management | Personal Finance | Articles Should I get a personal loan? : Here’s when we think we should, the Simple Sum team | July 13, 2022 | 8 minutes of reading
This article is brought to you by CIMB CashLite Personal Loan. New bank customers can apply for loans with interest rates of up to 3%* per annum (EIR 5.64% per annum) and no processing fees.
What do you do when you are in financial trouble and don’t have enough money? At school we borrowed lunch money from friends to get us through the holidays. While you can still borrow money from friends as an adult, you can also get a personal loan – it’s not the same as a home or car loan.
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Personal loans offered by banks allow a person to borrow a certain amount of money based on their monthly income, relationship with the bank and credit score. You could argue that a credit card allows you to do the same thing – pay for things with money you don’t currently have – but at a lower personal loan interest rate, making repayments more affordable and debt management easier.
But just because personal loans are available and easy to apply for doesn’t mean you should take advantage of them just because you want to spend more. On the contrary, good financial management shows that personal loans should be taken for a good reason. So what counts as a “good enough” reason?
For some of us, it’s not unrealistic for our debt to spiral out of control, especially if we weren’t taught good financial habits before we got into debt. Specifically, you may have accumulated credit card debt that is now difficult to pay off. A personal loan can be your answer to paying off credit card debt before it piles up.
Credit card debt can completely wipe out your finances in an instant. On average, credit card APRs can be as high as 30%, meaning the interest that accrues on your balance can exceed the amount you’ve paid back, even if you’re only paying the minimum monthly payment.
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Personal loans, however, are much lighter on your wallet, with annual interest rates ranging from 3% to 5%. Unlike credit cards, where you have to pay a certain percentage of the card balance as a minimum amount, the interest rate on a personal loan is fixed for the entire term of the loan. This means you don’t have to pay more than the fixed monthly repayments, so you can plan your budget as your monthly debt obligations are more predictable.
When you apply for a personal loan, add up your credit card debt and choose a loan amount that you can pay off in full.
Keep in mind that when comparing personal loans, choose the loan that offers you an attractive effective interest rate (EIR). The indicated interest rate is only nominal and does not take into account the actual price of the loan. The effective interest rate (EIR) also affects administrative fees and costs.
For example, if you take out a $25,000 personal loan with an APR of 5%, but with an additional 1% processing fee, the total interest you pay back is not just $1,250, but actually $1,500. In other words, while the nominal interest rate is 5%, the EIR is actually 6%!
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The repayment plan – the number and frequency of installments – also affects the EIR.
If you want to decide on the right personal loan, you need to find out your needs and capabilities. If you’re struggling with cash flow, choosing a personal loan that requires you to pay more each month and has a shorter term may not be the best option.
At any point in your life, you may need to make a major purchase. This includes paying for an upcoming wedding, refurbishing and equipping your long awaited BTO and even replacing your trusty laptop that has finally been given away after years of care and use.
If you can’t save up for it yet, but for some reason you absolutely need to make a big purchase right away, you can consider paying for it with a personal loan (instead of a credit card). As mentioned above, lower interest rates make personal loans easier to process and manage than credit cards. The benefit isn’t just lower interest rates – getting a personal loan can actually help you plan your finances better because of the term of the loan.
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Basically, the loan term is the time frame in which you can repay the loan in full. Your loan can be for 12 months, 36 months or even longer. Knowing your repayment terms will help you plan your monthly budget and finances and help you pay as little as possible.
Please note that if circumstances change and you suddenly cannot repay within the agreed time, you can decide to change the term. But extending the loan term comes at a price, and not all banks offer this flexibility, so make sure your financial situation can handle the increased debt obligations.
If you anticipate that you will have cash flow problems after a large purchase, or if for any reason you simply cannot save money in time, a personal loan will allow you to adjust your efforts to create a more transparent cost sheet after monthly repayments. But of course, it’s best to pay upfront with your hard-earned savings if you can.
Another instance where you can apply for a personal loan is when you are faced with a sudden financial crisis, such as a medical emergency that you cannot afford.
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While it’s always best to have an emergency fund ready and an insurance policy to ease the amount you pay up front, sometimes we may not be prepared for a sudden crisis or need more than we need.
So, if you’re not liquid enough to see your savings through a crisis, a personal loan may be your next best option. But instead of developing such habits, you should develop your financial habits, such as saving money before you spend it and building a solid emergency fund to weather various storms without being overwhelmed.
When you have a big need, personal loans are easy to get and most banks in Singapore will allow you to apply. But before you take out a personal loan, there are some important details to look out for, such as the nominal interest rate (also known as the advertised interest rate), the effective interest rate (the actual cost of taking out that personal loan, including additional fees and charges), the loan term ( repayment period) and repayment plan.
We should also remember that just because personal loans are easy to get, it doesn’t mean it’s suddenly okay to be financially irresponsible. We still need healthy financial habits to manage our repayments and debts and live happier lives in general. Personal loans can help you manage your financial needs with repayment plans and extended repayment terms as needed, but they are purpose-built funds – they’re not just for a quick burst of wealth!
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If you are looking for a personal loan, whether to cover an emergency, pay off a large bill or consolidate existing debt, you may want to consider applying for a CIMB CashLite personal loan.
The CIMB CashLite Personal Loan offers fixed interest rates of up to 3% per annum*. (EIR 5.64% annually) for new clients of the bank and zero handling fees. This is one of the lowest rates posted online at banks until June 1, 2022. You can also earn up to $1,000* in cash with 3-5 year loans of at least $5,000.
For the avoidance of doubt, the above information is provided solely on a non-reliance basis and does not constitute any advice of The Simple Sum or CIMB Bank Berhad. You should assess your own financial situation and needs.
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