Reducing the cost of borrowing money
If you need to borrow money, paying with a credit card or going to a moneylender is quick and easy. However, it’s also expensive. By looking for other options, you can pay a lot less interest and save money.
Whether it’s an emergency or replacing a broken refrigerator or something else, many of us will need a loan at some point. Although loans can be useful when money is tight, they can also be very expensive if we don’t borrow carefully.
If you buy something with a credit card and don’t pay the full amount right away, you’ll often end up paying about 28 per cent per year in interest. Borrow just S$1,000 and it will cost you more than S$280 per year. Surprisingly, about one-third of credit cardholders don’t pay their entire bill and pay that much in interest.
If you go to a moneylender, interest rates are often even higher. Regulations allow moneylenders to charge up to 4 per cent per month and a fee of 10 per cent of the loan. You could end up paying more than S$480 a year for that loan of just S$1,000.
SHOP AROUND FOR A PERSONAL LOAN
If you do need money, you can save a lot by using alternatives to cards and moneylenders. Or if you have already borrowed on your credit card or from a moneylender, you can take out a loan somewhere else to pay it back.
While banks offer specific loans for mortgages or cars or renovations, you will likely need a personal loan if you need money for something less specific. Shopping around makes a big difference.
Banks offer personal loans with far lower rates than credit cards. DBS charges about 3.88 per cent, for instance, and Citibank charges about 4.27 per cent. Banks usually only lend if you have a good credit history and a stable income, so you’ll need to check whether you’re eligible. Even then, it pays to be careful.
Although banks advertise a headline interest rate, you will usually pay a higher “effective interest rate” (EIR). While the calculations are complex, a simple example illustrates the difference.
If you borrow S$1,000 at an advertised rate of 4 per cent, for instance, you would pay S$40 per year in interest. Even though your balance declines as you pay off the loan and your average balance is about S$500, you would still pay that S$40 — on the average balance of $500.
The effective interest rate, paying S$40 on borrowings of S$500, is about 8 per cent. You may pay an “origination fee” of 1 or 2 per cent, too.
The best way to find a personal loan is often through comparison websites such as SingSaver or GoBear. You can use the money you borrow to pay off a credit card and save, even at the higher EIR.
CO-OPERATIVES, A LESS KNOWN OPTION
An even-less-expensive alternative that many people don’t think about is borrowing from a co-operative society.
Co-operatives started here nearly a century ago to provide a safe place for savings and access to affordable credit.
Admittedly, they are not all open to everyone. Only teachers can get loans for 3 per cent at the Singapore Teachers’ Co-operative Society, and Polwel is for police officers.
Other co-operatives are more accessible. TCC, formerly the Telecoms Cooperative Society, says it is open to all Singaporeans and permanent residents. The interest rate for loans is just 6.99 per cent.
While you would likely need to establish a track record before borrowing, you could join a credit union if you need to take up loans periodically in the future.
If you don’t qualify for bank or co-operative loans, a less attractive though still-lower-cost alternative is pawnbrokers.
If you have jewellery or phones, for example, you may be able to use them for collateral for a loan, at an interest rate of about 18 per cent per year. You can still get your items back if you pay off the loan.
WATCH FOR OTHER DETAILS
Beyond just looking at the interest rate, it is important to make sure the loan has the features you need.
Check to see whether you can pay off part or all of the loan early. Some loans have a minimum duration of a year or two, for example, so you will pay interest even if you have enough money to pay off the loan. If the terms allow you to make extra payments periodically or pay fortnightly rather than monthly, you will pay less interest overall.
You should also make sure you have enough income to pay back the loan. You can use loan calculators at banks to calculate the payments and decide whether the loan fits your finances.
Experts suggest preparing a budget and making sure that your mortgage and other loans do not exceed 35 per cent of your income.
What is most important, though, is borrowing the right amount. Even if you can borrow more, it is better not to take more than you need so that you don’t pay extra interest.
It is always better not to borrow for everyday expenses, though you may need a loan sometimes for unexpected situations. Rather than using a credit card or going to a moneylender, looking for alternatives can save you a lot of money.
