Borrowing money is something we try to avoid as much as possible, as long as we have enough to afford our needs.
However, things may go differently than we expect them to. For example, we could encounter a medical emergency in the family, face a sudden loss of income, or start planning for a new important milestone like buying a house or car.
When we find ourselves in such situations, taking a loan might feel like a huge risk, or even taboo.
But with careful consideration, there are times when loans can be a legitimate solution. The most important thing is to properly assess your situation and decide whether you can safely take a loan, or whether it will only land you in more financial trouble.
Before you take on a loan, here are five questions you need to ask yourself first:
1. Can You Afford The Repayment?
This might sound obvious, but difficult circumstances can sometimes make people anxious to jump the gun on a loan, only to realise later that the repayment is too large for them to handle.
Firstly, keep calm and carefully work out a budget. Calculate the amount you will be repaying, including interest as well as other costs like the bank’s administration fees.
Then compare that with your income, minus the amount you need to set aside for regular expenses. Also bear in mind how long you will take to repay it — the longer it takes, the longer you’ll be burdened by it.
If you have a clear and realistic repayment plan that’s within your means, go for it.
On the other hand, if you find yourself relying on a lot of guesswork to figure out how you’ll repay the loan, it’s probably a bad idea.
A loan should be within your means based on the income you have already secured, not including any additional income you think you can make from extra jobs you intend to take.
Be honest with yourself, or you’ll suffer more trying to make ends meet to repay a loan you couldn’t afford.
2. Will A Loan Help You Reach An Essential Goal?
Your purpose for taking a loan is another crucial question. At the right time, a loan can be useful in helping you achieve important goals that add value to your life.
The money could be your key to taking 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’s considered an essential goal may be slightly different from one person to another, so ask yourself whether you really need it.
It goes without saying that you shouldn’t take a loan in order to live a lifestyle you can’t afford.
Checking an expensive holiday off your bucket list or owning luxury handbags and watches are never good reasons to put yourself in debt.
Some purchases that seem necessary for your goals might also come with higher-end options that are not justifiable. For instance, it might be time to invest in a functional car for your family, but you definitely don’t need to buy a Mercedes.
3. When Will Your Financial Situation Improve?
Through this extended ‘circuit breaker’ in Singapore, many people are facing a loss of income as all non-essential services have been mandated to close.
Even when things can return to business-as-usual, we still have to brace ourselves for an economic crisis that will have lasting impacts.
For some individuals, there may be a clear end in sight to this dry season. If you’re a freelancer who can’t work now but have a roster of confirmed jobs that will resume a few months later, you could take a loan to pay for some of your expenses for now.
Or if you earn an income from sales commissions, you might also have a line-up of signed contracts to assure you that money will come in soon.
However, the uncertainty of the Covid-19 climate calls for us to be more discerning.
That means you have to be extra certain that there’s no reason for your upcoming jobs to be cancelled, or deals to fall through.
If you can’t say for sure, then maybe it’s best not to make any risky decisions.
4. Are You Bound To A Lot Of Financial Commitments?
Besides the loan you’re thinking about now, what other expenses do you have to pay off?
At a certain point in almost every Singaporean’s life, you can expect to be paying off your housing loan for a good 20 to 30 years (albeit mostly through your CPF). Some people may also have taken student loans to pursue their studies.
On top of these, and other recurring expenses like credit cards and insurance, you should be sure you can still manage another loan before signing on the dotted lines.
If you are currently juggling many financial commitments, or have already taken several loans, don’t load more onto your plate.
When you’re struggling to handle your existing payments, it’s a clear sign that you shouldn’t be increasing your debt.
You should especially avoid taking on new loans to pay off old ones, unless you can do so at a lower interest rate, or through a debt consolidation loan.
5. How Is Your Credit Score?
Having good credit gives you access to cheaper loans because banks may qualify you for lower interest rates. In turn, it makes every payment easier to manage
Everyone starts off with no credit, and your score builds up as you make credit card payments and take loans.
So if you currently have a good credit score, you probably already know that you have a track record of handling payments well and on time.
The opposite is true if you have a bad credit history. Two major factors that carry the most weight on a poor score are defaulting on payments and having a large amount of debt
As banks assess how likely you are to pay them back on time, some might not be willing to offer you a loan at all
Even if you can get a loan, you will be subjected to higher interest rates, which could make your loan extremely costly.
Where To Secure A Personal Loan
If you have considered carefully and decided that taking a loan is the right choice, you can visit a finance comparison site to explore and compare different types of loans from various banks in Singapore.
SingSaver is one of these great platforms — plus, they are currently running a promotion with Standard Chartered on its CashOne Personal Loan.
From 6 April to 30 June 2020, three applicants each month can win a #CashCushion and have their repayment amount including interest fully waived, up to S$10,000.
The CashOne Personal Loan lets you borrow up to four times your monthly salary (capped at S$250,000), starting from a flat interest rate of 3.88 per cent per annum (Effective Interest Rate from 7.67 per cent per annum).
Applicants can enjoy instant approval and disbursement, and get cashback worth 50 per cent of their first month’s instalment.
On top of that, SingSaver and Standard Chartered are also offering S$199 in cashback to offset the first year’s annual fee.
More details about the CashOne Personal Loan and #CashCushion promotion are available on SingSaver. To learn more or sign up, click here. Terms & conditions apply.
This article was written in collaboration with SingSaver.
Featured Image Credit: iCompareLoan.com