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How Do Personal Loans Work

Regardless of whether the borrowed money gets used for home renovation, a business opportunity, a vacation, or a dream wedding – personal loans do provide the much needed financial independence to make the most of any occasion or event. So how do personal loans work?

In the likeliest of scenarios, almost anyone with the necessary verified and relevant documents in hand would be able to get his/her hands on personal loans. The amount of money that can be borrowed depends on the borrower’s income status. The richer the monthly purse, the better would be the personal loan scope!

People with bad credit history are usually not the ideal candidates for personal loans in Singapore, or any other part of the world. However, there are some banking institutions that may consider loaning to such past defaulters, provided the bank verification process of all the necessary documents goes without a glitch. As a measure to tackle the riskiness attached to such high-risk candidates, the lending institution may levy a higher rate of interest on the loaned sum.

The interest rates with personal loans vary, and it usually depends on the kind of loan being undertaken. As mentioned above, the credit profile of the borrower would also end up influencing the rates. The exact rate of interest would usually be revealed during the time of application. The personal finance executive would arrive at the number after taking into consideration certain parameters, such as the borrower’s age, credit history, job status, other outstanding loan arrangements, loan amount and duration, etc.

Though the application and eligibility requirements across multiple Singapore banks and other finance institutions may vary, there are certain aspects that are common across the board.

The applicant must be a permanent resident Singaporean, or a foreigner who has valid work permits necessary for working in Singapore. The borrower should be 21 years or more in age. Most Singapore banks require the applicant to submit the loan request in person or at the bank’s physical premises.

Singapore citizens seeking personal loans should have the following documents: i) a passport or NRIC, ii) a confirmation or employment letter from the employer, iii) payslips of the last three months, iv) recent billing proofs, such as latest bank statements, mobile phone bills, etc., and v) some lenders would require a tenancy agreement if the applicant resides in a rented place. These document requirements would also apply to foreigners working in Singapore.

The old adage “the higher the risks, the better would be the returns” usually does not apply to banks and other lenders. Most financial institutions are always on the lookout to maximize their earnings, without necessarily increasing their risk appetite. In Singapore, the maximum amount an individual can borrow as personal loan is usually four times his/her monthly income. If the salary’s quite impressive, then some negotiations may work in the borrower’s favor, with the ceiling amount getting an upward push. Similarly, there are base or minimum amount restrictions as well.

Personal loans are generally unsecured loans, or financial transactions wherein a collateral arrangement ceases to exist. As a result, the approval rates for the loan are usually low. In other words, not every applicant gets approved. However, a good credit history would make the approval process smooth and quick.

Fees and charges are usually part of the personal loan scenario. Processing fees, insurance fees, etc. are some common charges identified with these loans. Repayment of personal loans is typically done every month. Most lending institutions in Singapore would want the borrowers to run the loan for a certain minimum duration – usually a few months or even a year. In case the periodic payments are not done on time, late payment penalties would be applied. The exact penalty fee would, however, vary with different lending institutions.