Loan Basics

Loans can be effective financial tools to help you achieve your goals, but they must be used wisely. If you’re thinking about borrowing money, consider your options carefully.

Secured loans

Secured loan is when you offer something as security in return for the money you borrow as collateral – such as property, your deposits or other assets. This offers lower interest rates than unsecured loans. However, banks or other lenders can claim your asset if you default on your loan repayments

Guarantees and sureties

If lender is unsure about your ability to repay the loan, they ask for a surety/guarantee, a legally binding agreement that a third-party (usually a person or a company) accepts responsibility for the loan if not paid. This third party is known as a surety/guarantor. If the surety fails to meet the obligation, the lender has the right to take legal action against the surety.

Unsecured loans

With an unsecured loan, you borrow money without collateral. Interest rates for unsecured loans are higher than secured loans because you are not offering any security to the lender. Credit score is taken into consideration when applying for unsecured loan, and your score suffers if you have trouble with repayments.

Fixed vs. floating interest-rate loans

Floating-rate loan – A loan with an interest rate that rises and falls – or floats – with market interest rates. The interest rates for most floating-rate loans change in accordance with the prime rate.

Fixed-rate loan – A loan with interest that remains fixed for the loan’s entire term, regardless of market interest rate fluctuations. Some people prefer this type of loan because their payments will remain the same throughout the duration.

Interest rates of loan products

Interest is usually the main cost of taking out a loan. Depending on the types of loans, there are different commonly used basis on which interest is calculated in the market, monthly flat rate or annual rate for personal instalment loans and daily or monthly compound rate for credit card outstanding balance.

Repayment terms

Set a period of time to repay the money, typically from 6-48 months. If you choose a longer repayment period, you will reduce the size of the monthly payment, but increase the total amount of interest payment. Your repayment period can affect the interest rate of the loan.

Documents for loan application:

Banks/lenders will require documents to support loan application.

>Permanent Resident Identity Card

>Proof of income – latest payroll slip, bank statement or passbook listing your name, account and salary.

>Proof of residential address, such as a utility bill or bank statement.

 

Fees and charges

Lenders are required by law to publish their fees. Be aware of common fees and charges when borrowing:

>Processing fee charged by banks or financial institutions for a loan

>Early repayment charge: The bank charges extra fee if loan is paid earlier than the agreed term.

>Late repayment charge: If monthly repayment is overdue.

>Cancellation fee: Cancelled loan after signing the contract.

Author: Michael Welter

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