25 Jul 2024

Using a personal loan to your advantage

If you’ve only got a minute:

Assess your needs and financial situation before taking a personal loan.
Only borrow what you need to avoid unnecessary interest charges.
Taking a personal loan to invest in education or expand a business can yield long-term financial benefits that outweigh loan costs.
Set up automatic payments (e.g. GIRO) to make payments on time to avoid penalties and maintain a good credit score.

A personal loan can be a strategic financial move when managed properly. It can help consolidate debt, finance a significant purchase or cover unexpected expenses.

With careful planning and responsible management, a personal loan can become a valuable tool in achieving your financial goals.

Here are 7 tips on how to use a personal loan to your advantage.

1. Understanding your needs

Before taking out a personal loan, it’s crucial to assess your financial situation and determine the specific purpose for the loan. Keep in mind only to borrow what you need as every dollar borrowed incurs interest, increasing your total repayment amount.

For example, if you need S$10,000 to cover a medical expense, borrowing S$15,000 would mean paying interest on an additional S$5,000 unnecessarily.

2. Maintain a good credit score

Your credit score plays a significant role in determining your personal loan interest rates. A higher credit score typically qualifies you for better loan terms.

For instance, if a financial institution can ascertain your history of timely repayments, you might be rewarded with a lower interest rate.

To improve your credit score:

Consider paying off existing debts to reduce your outstanding loan amount.
Avoid only paying the minimum sum for your debts.
Limit new credit applications as it can lower your overall score. More importantly, multiple applications in a short period can signal financial distress.

Read more: Personal loans vs line of credit

3. Negotiate terms and explore your options

When seeking a personal loan, it is important to reach out to different banks and compare products to find the best terms regarding interest rates, fees and repayment schedules.

In addition, do your own due diligence by conducting market research on the rates others are getting (through online platforms and/or forums) to understand current rates and discover the market normal instead of simply going for what is offered.

As the saying goes, “never ask never know”. Do not be afraid to ask and negotiate with lenders for better terms as you might secure fee waivers or lower interest rates simply by asking.

To illustrate, Bank A offers a personal loan at 8% interest with a S$200 processing fee. Bank B offers 7.5% interest with no fee. In this case, you might use Bank B’s offer to negotiate a better rate or fee waiver with Bank A.

By shopping around, you’d be able to leverage offers amongst your options.

More importantly, always read the fine print. Make sure you understand all the terms and conditions, be mindful of any jargon (remember to clarify!) before signing to avoid any hidden fees or unfavourable clauses.

Avoid payday loans - a type of short-term unsecured loan that are typically due by the next time your salary is paid, and high-interest personal loans as they can lead to a cycle of debt.

4. Use the loan for productive purposes

A personal loan can be used for various productive purposes that can enhance your financial position and improve your quality of life.

Here are some specific examples:

Education

This can yield long-term benefits, such as higher earning potential and better career opportunities. You can use a personal loan to cover tuition fees for a specialised course or a certification program that could lead to a promotion or a new job.

Instead of taking up a tuition loan that is limited to tuition fees, a personal loan can cover additional education costs like living expenses, books, equipment etc .

A study loan may also be restricted to certain types of institution or only full-time studies, so a personal loan could be an alternative. Do note that in most cases, a study loan would make more sense since the loan typically only incur interest after graduation.

Starting/expanding a business

This can include purchasing inventory, investing in marketing or upgrading equipment.

For example, John owns a small coffee shop and wants to open a second location. He needs S$20,000 for renovation and equipment. He takes up a DBS personal loan at 2.68% p.a. interest (EIR 5.43% p.a.) over 5 years. His monthly repayment is approximately S$378 (total repayment: S$22,880).

The new location generates an additional S$50,000 in annual profit, far exceeding the loan cost.

To temporarily cover large medical bill

Unexpected medical expenses can strain your finances. A personal loan can help alleviate these costs without depleting your savings, however, it should be viewed as a last resort due to high interest costs.

Consider exploring alternative assistance programmes, maximising insurance coverage and claims and negotiating with healthcare providers if more sustainable solutions can be offered.

National healthcare schemes such as MediShield Life and MediSave can provide help for medical expenses and they’re often more advantageous than personal loans.

If a personal loan is necessary as a temporary measure, plan to repay it quickly once other funds become available to avoid incurring significant interest and debt. Taking a loan for medical bills can potentially add to financial stress, especially if health issues persist.

Debt consolidation

Consolidating high-interest debts into a single personal loan with a lower interest rate can reduce your total interest payments.

Read more: Ease your financial burden with a DCP

Home improvement

It’s a common misconception that specific-purpose loans (e.g., renovation loans, student loans) are the only viable options for those specific purposes.

For example, renovation loans are often tailored for home improvements with potentially lower interest rates but more specific use restrictions.

Scenario: You plan to renovate your home to increase its market value before selling and are considering between taking the DBS renovation loan and a DBS personal loan.

Renovation cost: S$30,000

Loan Tenure: 3 years

	Personal Loan	Renovation Loan
Key characteristics	1. General-purpose loan 2. Provides cash upfront (use at your own discretion)	1. Specific-purpose loan (only for home reno) 2. Loan amount disbursed directly to contractor in stages
Interest rate	2.86% p.a. (EIR 5.71% p.a.)	5.88% p.a. (EIR 6.59% p.a.)
Chargeable interest	S$2,712	S$2,797
One-time processing fee (1%)	S$300	S$300
Insurance charges (1%)	N.A.	S$300
Total repayment	S$33,012	S$33,397

Note: Calculations are based on DBS Renovation Loan Calculator and DBS Personal Loan Calculator.

In this case, a personal loan (general-purpose loan) is more advantageous as it offers lower overall costs and yields a higher return.

By exploring alternative financing solutions and ongoing promotions, you might be able to uncover better terms, reveal unexpected savings or more flexible options.

Other loan purposes include:

Financing a wedding
Relocation costs – a personal loan can cover moving expenses, security deposits and initial living costs.
Emergency expenses such as car repairs or urgent home repairs.
Travel –if you have a special trip in mind that requires immediate funding (for example, tending to a family member who has fallen ill overseas).

That said, it's best to save up and budget for foreseeable expenses like weddings and trips (vacations).

If taking a loan, borrow minimally and ensure you can repay comfortably based on your budget.

Read more: An easy guide to unsecured loans

5. Create a repayment plan

Once you’ve decided to go ahead with the personal loan, develop a repayment plan that aligns with your budget and set up automatic payments (e.g. GIRO) to avoid missing due dates to prevent penalties and maintain a good credit score.

6. Monitor and manage your finances

Keep a close eye on your overall financial health by tracking your expenditure religiously, maintain an emergency fund covering 3 to 6 months of expenses and avoid accumulating new debts.

Regularly review loan statements to ensure payments are correct.

Do consider refinancing the loan when interest rates fall or when your credit score improves to reduce monthly payments and total interest paid.

7. Seek professional help

If you're unsure about taking out a personal loan or how to use it effectively, consider seeking advice from financial advisers.

They can provide personalised guidance based on your financial situation and help you make informed decisions.

All in all

A personal loan can be an advantageous financial tool when used strategically. Understanding your financial situation and the loan terms can help you maximise the benefits.

Always compare rates, plan your repayment and use the funds wisely to ensure the loan serves as a positive financial step.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.