We try to avoid borrowing money as much as possible, as long as we have enough to afford our needs.
However, things can go differently than we expect. For example, we could encounter a medical emergency in the family, a sudden loss of income, or plan a new important milestone, such as buying a house or car.
When we find ourselves in such situations, taking out a loan can be a huge risk or even a taboo.
But with careful consideration, there are times when loans can be a legitimate solution. The most important thing is to correctly assess your situation and decide whether you can take out a loan safely or whether it will only cause you major financial difficulties.
Before you take out a loan, you have to ask yourself five questions:
1. Can you afford the repayment?
This may sound obvious, but difficult circumstances can sometimes lead people to put the gun on a loan and later realize that the repayment is too high to handle.
First, stay calm and carefully work out a budget. Calculate the amount you will repay, including interest and other costs such as the bank's administration fees.
Then compare that to your income minus the amount you have to put aside for regular expenses. Also, remember how long it will take you to repay it – the longer it takes, the longer you will be charged.
If you have a clear and realistic repayment schedule that suits your options, go for it.
On the other hand, it is probably a bad idea if you rely on a lot of guesswork to figure out how you will repay the loan.
A loan should be within your means based on your already secured income, with no additional income that you think you can earn from additional jobs that you want to take on.
Be honest with yourself, or you'll suffer more from trying to make ends meet to repay a loan you can't afford.
2. Does a loan help you achieve an essential goal?
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Your purpose for taking out a loan is another important question. At the right time, a loan can be helpful to achieve important goals that add value to your life.
Money could be your key to getting a university degree, renovating your new home, or buying a family car to drive your kids to school.
For aspiring entrepreneurs, a loan could fill the gaps in your savings and give you the capital you need to start your own business.
What is considered an essential goal can vary slightly from person to person. So ask yourself if you really need it.
It goes without saying that you shouldn't take out a loan to live a lifestyle you can't afford.
Deleting an expensive vacation from your bucket list or owning luxury handbags and watches are never good reasons to go into debt.
Some purchases that seem necessary to your goals may also offer high-end options that are not warranted. For example, it might be time to invest in a working car for your family, but you definitely don't have to buy a Mercedes.
3. When will your financial situation improve?
This expanded "circuit breaker" in Singapore means that many people face loss of income because all non-essential services have to be closed.
Even if things can work as usual again, we have to prepare for an economic crisis that will have lasting effects.
Some people may see a clear end to this dry season. If you're a freelancer who can't work now but has a list of confirmed jobs that will resume a few months later, you can take out a loan to pay part of your expenses for the time being.
If you earn revenue from sales commissions, you may also have a number of signed contracts to make sure the money is coming in soon.
However, the uncertainty of the Covid 19 climate requires that we be more critical.
This means that you have to be particularly sure that there is no reason to cancel your upcoming jobs or fail.
If you can't say for sure, it may be best not to make risky decisions.
4. Are you bound by many financial obligations?
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What other expenses do you have to pay back besides the loan you are thinking about?
At some point in almost every life in Singapore, you can expect to repay your home loan for a good 20 to 30 years (though mostly through your CPF). Some people may also have taken student loans to continue their studies.
In addition to these and other recurring expenses such as credit cards and insurance, you should be sure that you can manage another loan before signing on the dotted lines.
If you are currently juggling a lot of financial obligations or have already taken out several loans, do not load onto your plate anymore.
If you are having difficulty processing your existing payments, this is a clear sign that you should not increase your debt.
In particular, you should avoid taking out new loans to repay old ones unless you can do so at a lower interest rate or through a debt consolidation loan.
5. What is your credit score?
Having good credit gives you access to cheaper credit because banks may qualify you for lower interest rates. This in turn makes it easier to manage every payment
Everyone starts with no credit and your score increases as you make credit card payments and take out loans.
If you currently have good credit, you probably already know that you have a track record of making payments well and on time.
The opposite is the case if you have a bad credit rating. Two main factors that weigh the most on a poor score are defaults and high levels of debt
As banks assess how likely you are to repay them on time, some may not be willing to offer you a loan at all
Even if you can get a loan, you will be exposed to higher interest rates, which could make your loan extremely costly.
Where you can secure a personal loan
Once you've carefully considered and decided that taking out a loan is the right choice, you can use a financial comparison page to examine and compare different types of loans from different banks in Singapore.
SingSaver is one of those great platforms. They are also currently running a campaign with Standard Chartered for their CashOne personal loan.
From April 6 to June 30, 2020, three applicants can win a each month #CashCushion and have theirs Repayment amount including fully waived interest up to S $ 10,000.
With the CashOne personal loan, you can take up to four times your monthly salary (maximum S $ 250,000) from a flat rate of 3.88 percent per year (effective interest from 7.67 percent per year).
Applicants can get approval and payout immediately and receive a cashback equal to 50 percent of their first monthly installment.
SingSaver and Standard Chartered Cashback also offer $ 199 to offset the first year annual fee.
More information about the CashOne Personal Loan and the #CashCushion campaign can be found on SingSaver. To find out more or to register, click here. General terms and conditions apply.
This article was written in collaboration with SingSaver.
Selected image source: iCompareLoan.com