Borrowing comes with a cost. However, a good borrowing strategy can help to increase your net worth and improve your liquidity. For example, taking up an education loan could be beneficial for you to acquire new knowledge or skills and increase your future income.

How much and when should we borrow? Here is a checklist when applying for credit.

• Budget. Consider your budget in the near and long term to ensure you cover foreseeable expenditures. This would avoid having to apply for multiple loans in future.
  
  
  
• Credit Report. Find out your credit score by purchasing the report for $6.42 from Credit Bureau Singapore online or through any SingPost outlets. If your credit report is favourable, lenders are more likely to approve your loan application. The opposite is true as well.
  
  
  
• Credit Limit. You can obtain unsecured loans by providing your payslips when applying for the loan without having to offer any collateral. The maximum credit limit you can obtain may differ across different lenders.
  
  
  
• Effective Interest Cost. To ascertain the true cost of the loan, use the effective interest rate (instead of nominal rate) as it takes the compounding interest payment into account. Note that different types of loans generally have different rates. For example, car loans are around 2-3% per annum while home renovation loans are around 3-4% per annum.
  
  
  
• Repayment Duration. Choose a comfortable repayment period which could be from weeks to years, depending on the type of loan. Loans with longer repayment periods will attract higher interest payment.
  
  
  
• Simple Interest or Monthly Rest. Check how your loan interest is computed. Simple interest refers to a fixed monthly payment of interest until the expiry of a loan. For the monthly rest basis, the interest payment will reduce each month.
  
  
  
• Processing fees / Underwriting fees / Penalty / Early Settlement charges. Some lenders charge processing fees when loans are disbursed. It could be a fixed amount or a fraction of the total loan amount. Some lenders may insist borrowers purchase insurance against the potential default of the loan. Be clear about the lenders’ terms should you default or delay a repayment. Some lenders may charge a fee when borrowers choose to settle their loans early. These will be in the fine print so be sure to find out about these additional charges before you take up the loan.

Source: SENSE, September/October 2020 issue, a newsletter by Singapore Government Staff Credit Co-operative Society Ltd.

This article is contributed by Mr Shelvaganeysh Periakaruppan, a chartered accountant registered in Singapore with more than 20 years of experience in accounting and tax. He holds a Masters in Applied Finance from the University of Adelaide and is currently a consultant in the private sector as well as a lecturer at a local private education institution. He is also an Independent Member of the Remuneration Sub Committee of SGS Co-Op since 2018. Thoughts and opinions expressed here are his own and do not reflect that of the society. For comments or feedback, please write to thc@sgscoop.sg.