SINGAPORE: Singaporeans are grappling with the relentless surge in living costs, prompting some to turn to personal loans to weather inflation.
The city-state, known for its steep living expenses, claimed the title of the world’s most expensive city in 2023, further compounded by a 9% Goods and Services Tax (GST) increase in 2024.
In the face of this year’s sweeping layoffs and escalating costs, personal loans can become more “desirable” to jump into. Although taking personal loans to combat the rising living costs comes with benefits, one should consider if they’re worth taking.
What is a Personal Loan?
A personal loan is a financial product extended by banks or lenders that provides borrowers with a lump sum amount repaid over a specified period, accompanied by interest.
Unlike loans for specific purchases such as cars or homes, a personal loan offers flexibility, making it an attractive choice for those seeking financial relief in the face of escalating expenses.
When applying for a personal loan, the lending institution scrutinises various factors, including credit history, loan amount, and repayment tenure.
The interest rate, a critical determinant of the overall repayment amount, is set based on these considerations.
Understanding the implications of interest rates, including the difference between applied and effective rates, is important for deciding.
But what are the pros and cons of taking a personal loan? Here’s what the benefits and risks are according to MoneySmart:
Pros of personal loans for rising costs of living
Affording Significant Expenses: Personal loans provide a feasible solution for individuals looking to afford large, one-off expenses, such as dream weddings or vacations, amidst the continual increase in everyday costs.
Immediate Financial Relief: Once approved, a personal loan injects a lump sum swiftly into the borrower’s account, offering immediate relief from pressing financial obligations, be it unexpected medical expenses or credit card debts.
Time for Long-Term Financial Planning: Beyond immediate relief, a personal loan affords individuals the time and mental bandwidth to formulate a long-term financial strategy, facilitating better budgeting and preparedness for unforeseen emergencies.
Cons of personal loans for rising costs of living
Long-Term Financial Obligations: Borrowers need to be mindful of repaying more than the borrowed amount, with costs escalating based on factors such as loan terms, interest rates, and processing fees.
Impact on Credit Score: Timely payments are crucial to maintaining a healthy credit score, influencing the ability to secure future loans or credit cards.
Potential for Misuse: The temptation to divert funds towards non-essential or impulsive purchases poses a risk of deviating from the intended financial need for which the loan was acquired.
While personal loans offer immediate financial relief and aid in managing significant expenses, potential drawbacks such as increased costs, credit score implications, and misuse must be considered. A personal loan can be a valuable tool if used wisely. /TISG