When we need extra cash, many Singaporeans may prefer to use their credit card instead of opting to take up a personal loan. With the ease of getting a credit card, it’s no wonder this is an easier option. However, there are situations where credit cards just won’t work and taking out a loan looks like a smarter option.
Here’s a look at how 4 types of people can benefit from taking a personal loan instead of using their credit card when they need some extra cash:
1. Entrepreneur
More and more Singaporeans are attracted by the prospect of being their own boss and the flexibility entrepreneurship offers. But starting out on your own can be tough, not just to raise capital, but also to keep business operations in order.
Small businesses will benefit from having cash to keep cashflow in order, hire new staff and expand operations. But the problem is it is difficult to get a business loan for a small business, so a personal loan could work in such a situation. While your business loan may come at a lower rate compared to a personal loan, the minimum amount to borrow may be higher, which can result in you paying for more credit than needed.
2. New Home owners
Buying a new home typically requires a large sum of money for various purposes – renovations, buying new furniture and home appliances. The benefit of getting a personal loan instead of a more specific loan like a renovation loan is that you have the flexibility to use the cash as you want. It can also be useful for times where you only need a loan for a short period of time since the interest rates are lower compared to credit cards.
There’s however, one instance where credit cards may be a preferred option – when it offers an interest-free instalment. In fact, many home appliances store in Singapore offer an interest-free instalment option when you pay with a credit card from their partner banks. This can ultimately be better deal than using a personal loan to pay for your purchases. The downside, however, is that it will lock down your credit limit on your credit card, which means you will not be able to use it until you’ve repaid the full amount.
3. Those who have multiple outstanding debts
It may seem counterintuitive to take out another loan when you’ve got multiple debts but it can actually help you focus on one debt to pay off. By consolidating multiple debts into one, you no longer need to track and ensure that you pay off a little of each debt every month.
Additionally, using a consolidation loan can potentially help you to reduce the total interest you pay. Let’s look at the difference if Alan were to use a consolidation loan.
Initial Debt:
$1000 with a Citibank credit card at 24% p.a
$5000 with a UOB credit card at 24% p.a
$10,000 with a POSB personal loan at 10% p.a
Total interest due $2,440 (without compounding)
With Debt consolidation loan
$16,000 with a personal loan of 11%
Total interest due equals $1,760.
Total savings with a debt consolidation loan = $2,440 – $1,760 = $680.
With the right consolidation loan, it can help you better manage the payment of your outstanding debts, as well as lower the overall repayments due to the lower interest rates.
4. Those who lack financial discipline
The problem with credit cards is that you are allowed a rolling credit as long as you pay the minimum amount each month. This can prove too tempting for those who love to shop since the credit limit may be higher compared to getting a personal loan.
A personal loan requires the borrower to borrow only a fixed amount, which also helps to limit over-spending. With a fixed amount to pay every month, it can also help the borrower to better manage his/her finances instead of only focusing on making the minimum payment on the credit card.
