Is Borrowing The Right Decision?
With the high cost of homes and the rising price of large-ticket items, many have touted Singaporeans to be “asset rich but cash poor”. A lot more goes into one’s financial considerations, and with the increasing rate of financial literacy among the younger population, attitudes towards borrowing and taking loans have moved away from being purely negative. So what should you really consider before taking on a loan?
How Much Do You Need To Borrow?
The first consideration is how much you truly need. Are you borrowing an excess of your urgent needs? If your needs are less urgent, are there ways that you could save up? Also, will you be able to foot the loan repayments and the full cost of taking on an additional loan?
If you are looking to make a property purchase during the tenure of this loan, do keep in mind that the Total Debt Servicing Ratio (TDSR) takes all loan obligations into consideration. So any loans that you do take will lower your capacity to take on more mortgages.
Who Should You Borrow From?
First and foremost, ensure that you are borrowing from a licensed entity or financial institution. The Monetary Authority of Singapore (MAS) website provides a list of licensed banks and financial institutions whilst flagging out dubious companies.
Licensed moneylenders can also be found in the Registry of Moneylenders containing all licensed moneylenders. This ensures that they comply with the law which provides safeguards to protect borrowers, relating to a limit on loan amounts, fees and interest rates.
We strongly advise never to borrow from unlicensed moneylenders or loan sharks.
Repayments are obligatory, and before taking the loan, you should have a clear idea on how you aim to repay all debts on time, taking into account your current financial situation. This includes ensuring that you have sufficient funds for your monthly living expenses. It is also recommended that you have an emergency fund of 6 times your monthly expenses to handle any unforeseen circumstances. To err on the side of caution, you can introduce a buffer of about 10% to account for any unexpected increase in expenses.
While it is true that a dollar today is worth more than a dollar tomorrow, it may not always make financial sense to put all purchases on credit or to take a loan at every possible opportunity. Lenders would often provide a schedule of repayments before you borrow any sum of money.
Similar to assessing a mortgage, these are 3 key points to look out for:
- Interest rate – Is the loan charging a fixed or floating interest rate? How often are these interest rates revised? To manage your risk, assess your ability to make loan repayments by analysing a worst-case scenario. A floating rate loan in a volatile economic environment may add on a significant amount to your monthly repayments
- Loan tenure – How long do you need to have this loan? Is the loan an amortising loan? A longer loan duration may result in higher costs over time, as well as the accumulation of interest. Is the purpose of this loan justified in view of the total interest payments throughout the loan tenure?
- Budget – Would taking on this loan impinge greatly on your current monthly expenses?
While a longer-term loan may demand relatively lower monthly payments than a shorter-term loan, the accrued interest may result in a significantly higher cash outflow throughout the loan tenure. In contrast, a shorter-term loan will demand higher monthly repayments, but in the case of an amortising loan, this goes towards repaying the loan balance. The benefit is that since the loan tenure is shorter, you accrue less interest.
With careful consideration and expert budgeting skills, you have taken your loan. Now it is time to think about paying it back and reducing your liabilities in a timely fashion.
Firstly, make your monthly repayments on time. Delays in your repayment may result in excessive penalties or interest on your outstanding loan balance. A month of mismanagement may snowball into a greater problem down the road.
Secondly, repay the loan as early as possible if you have available funds to do so. With mortgages, prepayment penalties are usually applicable unless waiver of prepayment penalty clauses are offered by your bank. The same may apply to cash loans so do discuss these details with your lender before taking the loan. By paying off your loan early with any spare cash that you may have, you effectively reduce your interest payable on the outstanding loan balance.
Lastly, keep a tight ship with managing your loans. If you have more than one loan, do spend the time to review each of them to assess the best approach for reducing your debts. Having too many loans at once may be difficult to keep track of and may result in additional stress.
Do feel free to reach out to our advisors who will be glad to assist you in optimising your profile.
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