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Unlike
deposits, lenders have to determine your ability and willingness
to repay, and protect themselves in case you do not. Lenders
figure the finance charge by using an interest rate or percentage
of the principal. Some lenders, like banks, use the prime
rate, which is traditionally the rate at which banks lend
money to their best commercial customers. However, this prime
rate may differ between banks. Percentage points are then
added to this prime rate which serves as a base.
Whatever you need the money for, do remember that it is easier
to borrow than to repay, so read the terms of the loan before
you take on the debt. In the box below, we sum up the various
types of loans you can make use of, and then take a look at
some of the more popular loans products in the market:
| Secured
Loans. This is when you put
up security or collateral to guarantee a loan. The lender
can sell the collateral if you fail to repay. Car loans
and home loans are the most common types. |
Unsecured
Loans. This is made solely on your promise to repay.
If you are considered a good risk, only your signature
is required. However, the lender may require a co-signer
who will be liable if you are unable to repay. Since unsecured
loans carry a higher risk for the lender, there is a higher
interest rate and more stringent conditions slapped on.
Do note that present regulations stipulate that unsecured
loans can be made only to an individual with a minimum
yearly income of $30,000, subject to a maximum of two
times his monthly salary (or $5,000, or whichever is the
lower, in the case of finance companies). |
| Term
Loans. Refers to one where you have to repay the amount
borrowed, including interest, in full within a fixed period
of time. Here, the borrower is usually required to repay
the sum through periodic instalments. Lapse of instalments
may lead to default. Examples include a car loan. |
Revolving
Credit. This has no fixed repayment term, and is a
contractual agreement between a bank and its customer
for the latter to use the money up to a specified maximum
sum for a specified period or even on a continual basis
until either side decides to terminate the agreement.
The customer makes a disbursement request to the bank
every time he requires the money, pay it back and reuse
the money should the need arise again. Examples include
overdrafts. |
| Fixed-Rate
Loan. This charges the same interest rate throughout
the term of the loan, and is a safe bet if you plan to
remain in the same home for a long time. It also allows
you to know your actual monthly instalment and to plan
accordingly. This may be important as current market conditions
seem to point to rising interest rates ahead. Fixed-rate
loans are usually short-term loans. |
Adjustable-Rate
Loan. The bank has the right to change the rate of
interest according to market conditions. A common practice
is to peg the rate at a fixed spread above the prevailing
prime rate. However, it is important to find out whose
prime rate your banker will be using, as they are not
necessarily the same. The Big Four banks (DBS, OCBC, OUB
and UOB) may share a common prime, which may be different
from ones quoted by banks like Keppel TatLee Bank and
Standard Chartered. Adjustable-rate loans may be a good
idea if you feel your earning power will increase over
time or you do not plan on staying long in your house.
Adjustable-rate loans are usually long-term loans. |
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