Rachael Boon A flurry of new attractive promo- tions for unsecured loans have hit the market ahead of new rules re- stricting loans to people with heavy debts. From June 1, if you have total unsecured debts totalling more than 24 months of your monthly income for more than 90 days, you will not be granted more unsecured loans. These are loans which do not require collateral, unlike mort- gages or car loans, for instance. This means anyone in this cate- gory won’t be able to apply for new credit cards or withdraw money from an unsecured credit line, for instance. The borrowing limit, however, does not apply to unsecured loans for medical, business and educa- tion needs, among other condi- tions. The online portal of Money- Sense, the national financial litera- cy programme, notes: “Most unse- cured loans charge fixed interest rates whether they are term or re- volving loans, unless promotional interest rates apply.” While unsecured loans are a quick and easy way to get extra cash and fixed interest rates may seem attractive, experts that warn you should be careful and prudent. The Sunday Invest looks at some promotions and tips on how to manage repayments. Some new offers What: Maybank’s CreditAble Term Loan Promotional rate: 3.78 per cent year for a one-year term (effective Continued on >>Page 28 PHOTO: ISTOCKPHOTO While unsecured loans are a quick and easy way to get extra cash and fixed interest rates may seem attractive, experts warn that you should be prudent. Unsecured loans: Easy credit, hard to repay? A look at new offers and expert tips on avoiding debt trap 27 invest April 26, 2015 thesundaytimes
Transcript
Rachael Boon
A flurry of new attractive promo-tions for unsecured loans have hitthe market ahead of new rules re-stricting loans to people withheavy debts.
From June 1, if you have totalunsecured debts totalling morethan 24 months of your monthlyincome for more than 90 days, youwill not be granted more unsecuredloans. These are loans which donot require collateral, unlike mort-gages or car loans, for instance.
This means anyone in this cate-gory won’t be able to apply for newcredit cards or withdraw moneyfrom an unsecured credit line, forinstance.
The borrowing limit, however,does not apply to unsecured loansfor medical, business and educa-tion needs, among other condi-tions.
The online portal of Money-Sense, the national financial litera-cy programme, notes: “Most unse-
cured loans charge fixed interestrates whether they are term or re-volving loans, unless promotionalinterest rates apply.”
While unsecured loans are aquick and easy way to get extracash and fixed interest rates mayseem attractive, experts that warnyou should be careful and prudent.
The Sunday Invest looks atsome promotions and tips on how
to manage repayments.
Some new offers
What: Maybank’s CreditAble
Term Loan
Promotional rate: 3.78 per cent
year for a one-year term (effective
Continued on >>Page 28
PHOTO: ISTOCKPHOTO
While unsecured loans are a quick and easy way to get extra cash and fixedinterest rates may seem attractive, experts warn that you should be prudent.
Unsecured loans:Easy credit,hard to repay?A look at new offersand expert tips onavoiding debt trap
PHOTO:ISTOCK-PHOTO
27investApril 26, 2015 thesundaytimes
interest rate is 10.5 per cent a year).If you borrow $10,000, for a repay-ment period of 12 months, themonthly instalment will be $865.Take note: You must be anexisting Maybank CreditAble cus-tomer to apply for this loan. A 2 percent processing fee will be deduct-ed from the loan amount dis-bursed.
What: Personal Loan on aCitibank credit card or CitibankReady CreditPromotional rate: 4.83 per cent ayear (effective interest rate of 9 percent a year) for a minimum loanamount of $5,000 on a 36-monthtenor, so the instalment wouldwork out to be $159 per month.Take note: It is valid only for newCitibank customers who are apply-ing for a Citibank Ready Credit ac-count with the loan offer.
What: UOB CashPlus PersonalLoanPromotional rate: 7.6 per cent ayear for at least $10,000, and 8 percent a year for amounts of less than$10,000. The loan period rangesfrom 12 months to five years.Take note: You need a minimumannual income of $30,000.
What: StanChart’s CashOnePersonal LoanPromotional rate: Flat rate of6.88 per cent a year for a loan of$15,000 and above for a five-yeartenor.Take note: Customers can get aloan of up to four times theirmonthly income – subject to a max-imum loan amount of $200,000 –upon approval if their annual in-come is $30,000 and above.
What: POSB Loan AssistPromotional rate: From 5.18 percent a year. For a $30,000 loan ofthree years, at a promotional rateof 5.18 per cent a year, the month-ly instalment would be $963.Take note: The rate is applicableto loans with terms of three to fiveyears, with a minimum approvedloan amount of $25,000.
The promotional rates, effectiveinterest rates – the actual rate youhave to pay – and terms and condi-
tions of loans are not exhaustive,so you ought to check with thebanks for more information beforemaking any decision on such aloan.
Pros and cons ofunsecured loans
Mr John Denhof, head of cards andpersonal loans at Citibank Singa-pore, says that Citibank’s offer al-lows customers to have a struc-tured and convenient way to man-age their finances by offering theflexibility of fixed repayment loanamounts with a choice of a loanterm ranging from 12 months tofive years.
Mr Choong Wai Hong, head ofcommunity financial services atMaybank Singapore, says one ad-vantage of such loans is that cus-tomers are aware of their repay-ment commitments and are there-fore able to manage their financeswith more certainty.
Mr Anthony Seow, head of cardsand unsecured loans of the consum-er banking group at DBS Bank, alsoreminds consumers that themonthly instalment and repay-ment period are fixed once youhave decided on the term of theloan, also known as the loan’stenor.
Customers should take note ofearly settlement fees if the loan iscancelled before its term is complet-ed.
Should you take outan unsecured loan?
Before you take the plunge, notethat interest rates for such loanstend to be higher than rates for oth-er loans. You need to think aboutwhat you are using the loan for.
Broadly speaking, debt comes intwo forms – good and bad.
Good debt is defined as debt in-curred to reap investment returns,and debt that you can afford to re-pay on time. Examples of gooddebt include mortgages, study andbusiness loans.
Bad debt is often incurred forpurchases that are useless or for de-preciating assets that will not pro-duce an income, such as alarge-screen TV set, for instance.
SingCapital chief executive offi-cer Alfred Chia says based on the
firm’s financial advisory experi-ence, many people get into the trapof excessive credit card debts owingto overspending, and they cannotdifferentiate between their needsand wants.
He explains: “You need a bag fordaily usage, but not necessarily abag costing a few thousand dollarsthat has the same function of onethat costs tens of dollars. I’m suremany women would disagree withme on that, which is precisely thepoint.”
Never use credit for investing,adds Mr Chia, as that involves a tre-mendous amount of risk.
But you may consider unse-cured loans if you have an emergen-cy need such as medical treatmentfor loved ones who do not have ap-propriate insurance.
Loan specialists will evaluateyour financial status and recom-mend a suitable loan amount, rate
and tenor based on your financialneeds and ability to repay the loanover time, says Ms Jacquelyn Tan,UOB’s head of cards and payments.
“This way, we make sure custom-ers do not overextend themselves fi-nancially.”
How much debtcan you shoulder?
Mr Christopher Tan, chief execu-tive of financial advisory firm Provi-dend, says from a financial plan-ning perspective – regardless of se-cured or unsecured debt – the guide-line is that you should not spendmore than 15 per cent of your sala-ry on non-mortgage debt.
How do you approach allthe debt that you have?
Providend’s Mr Tan advises againstbuying items based on interest-free
a false sense of underspending andyou end up buying things that youcan’t afford and shouldn’t buy inthe first place”.
Once you lose control, themonthly instalments can accumu-late to a large amount that willsoon go beyond your ability to pay.
Mr Chia’s major tip is to make ahigher minimum payment in orderto pay off the debt more quickly.
He gives an example of some-one who has a credit card balanceof $10,000 based on 25 per cent in-terest a year, and compares threescenarios (see table).
The first scenario would be tomake minimum monthly pay-ments of 3 per cent or $50, which-ever is higher.
The borrower would take 253months – just over 21 years – to payoff the total interest and principal.Interest would be about $20,148,on top of the principal of $10,000,which is a total of $30,148.
Mr Chia says the next plancould be to make minimum month-ly payments of 5 per cent or $50,whichever is higher.
The borrower would take a totalof 104 months – eight years andeight months – to pay off the totalinterest and principal, with interestaccumulating to about $6,736. So
his total payment would be$16,736.
“That mere 2 per cent increasein minimum payments would re-duce total interest by $13,412, thepowerful effect of compounding in-terest,” notes Mr Chia.
If you choose to make flatmonthly payments of $300, youwould pay off your debt morequickly.
The debtor would now take 58months – just under five years – topay off the total interest and princi-pal, with the interest adding up toabout $7,251, so his total paymentwould be $17,251.
Mr Tan adds: “ It will be unwiseto buy a big item using your creditcard, or with two or three creditcards, without having the ability orintention to pay it off as the inter-est rates are high and therolled-over amount will make itharder to pay.”
His view is that taking suchloans to pay for things that youcan’t afford, “seems to suggest thatsuch persons may be buying thingsthey don’t necessarily need withthe money they do not have to im-press people they don’t careabout”.
High interest rates“ It will be unwise to buy a big item using yourcredit card, or with two or three credit cards,without having the ability or intention to pay it offas the interest rates are high and the rolled-overamount will make it harder to pay.”MR CHRISTOPHER TAN, chief executive of financial advisory firm Providend
