SINGAPORE’S quick recovery from the global financial crisis has seen consumer sentiments and consumption moving in tandem.
It is a time when people might look to spend more on big-ticket items such as properties, cars and weddings and, in the process, take a loan to finance their purchases.
Getting a loan is usually not a difficult task, but there are many factors one should first consider.
‘Consumers should first be clear about the purpose of the loan and decide if it is worthwhile for them to take a loan,’ said Mr Sebastian Arcuri, head of Personal Financial Services at HSBC Bank.
‘They should weigh the interest and fee charges applicable against their need for the loan.’
Essentially, it all boils down to responsible borrowing. People should borrow only what they need and within their means, financial experts said.
‘At the end of the day, it is about the customers’ ability to repay the loan, as banks have robust credit and risk analysis to ensure we lend responsibly,’ said Mr Dennis Khoo, Standard Chartered’s general manager of retail-banking products.
Indeed, the foremost advice from lenders is that the borrower should ensure that they are able to meet the monthly instalments to pay off the debt eventually.
Those looking at getting a loan should thus spend time drawing up a list of their monthly expenditure obligations, add in the estimated monthly repayment amount of the loan, and then decide if they are comfortable with their remaining disposable income.
Deciding on a suitable loan tenor – the length of time until a loan is due – is also important.
Generally, longer loan tenors come with smaller monthly repayment amounts but higher interest rates. Consumers should choose what works best for them after reviewing their monthly commitments and cash flow.
GE Money, a non-bank lending provider, advises consumers to be aware of the unique offerings of each loan and look for loans that offer some payment flexibility.
‘Some loans provide features that cater to different customers needs,’ said GE Money. ‘For example, we offer loans with flexible options such as ‘payment holiday’, in which customers can skip up to two monthly payments a year in case of emergencies.
‘We also offer loans with a ‘pay interest only’ feature for the initial months, to meet borrowers’ need for lower payments at the onset.’
Most banks including HSBC, UOB and OCBC also offer similar customisable loan features.
In view of the competitive loan market, different lenders would offer promotions from time to time such as anniversaries. This could include discounts on prevailing interest rates or last-instalment waivers in exchange for prompt and timely repayments.
Consumers should do their own research on these promotions to capitalise on the potential for savings. Still, what’s vital is that one studies the terms and conditions of the loan package carefully and fully understand them.
Do not be rushed into taking up the loan – have staff from the financial institution explain the terminology used in the contract to make a well-informed decision.
One vital aspect that consumers should pay strong attention to is the various applicable interest rates. Some loan packages refer to monthly interest rates while others state annual interest rates. Borrowers must therefore be sure to compare different loan packages on the same terms.
Additionally, one needs to understand that loans do not always have a single interest rate over their tenors. There are fixed-rate loans as well as those with floating rates. A combination of fixed- and floating-rate interest in a single loan is frequently used too.
‘Consumers should also be alert to whether the interest rate stated in the loan agreement and marketing material refers to the annual percentage rate (APR) or to the simple interest rate, which can be quite different,’ said GE Money.
The simple interest rate is calculated by applying a flat rate on the principal for the entire loan period.
But simple interest does not take compounding into account and therefore does not reflect the actual interest cost of borrowing. Compound interest, or APR (since most people prefer to think of rates as a yearly percentage), would better reflect this.
Compound interest is calculated using the declining balance outstanding as repayments are made.
The interest that has been added also earns interest.
In other words, interest is calculated not only on the principal but also on the accumulated interest of prior periods.
‘Nominal or flat interest rates do not reflect the actual interest cost of a loan ‘ they do not factor in monthly principal repayments made throughout the loan tenor.
Thus, it is lower than the effective interest rate,’ said Mr Arcuri. ‘Consumers should always ask for the effective interest rate to ensure they are aware of the real interest cost.’
Borrowers also need to pay attention to other applicable fees.
There are charges such as acceptance and processing fees, late-payment charges, and early loan-redemption fee. One would know the true cost of the loan only after taking these fees into account.
Last but not least, consumers should look for personal-financing options that allow them to compile their debts into a single monthly bill. This makes it simpler for them to track their debt and plan the repayment schedule.
In the end, it’s important to exercise strong self-discipline when deciding whether to take up a loan. Know your financial capabilities, or you might end up being a slave to your debt, experts warned.
Source : my paper – 11 May 2010