April 5, 2009
Adding up the cost of unsecured loans
Make sure you can afford repayment, analysts advise
By Lorna Tan
From March 1, the rules changed for lower-income earners wanting unsecured loans - that is, any loan without collateral.
Hundreds of thousands of people earning between $20,000 and $30,000 a year each can for the first time turn to banks for such loans.
The changes come under the Moneylenders Act.
Previously, banks were excluded from this type of lending, which was served mainly by consumer finance firm GE Money, which could offer unsecured loans to such borrowers of up to four times their monthly income.
Terms of access
Here are some of the main changes:
§ Moneylenders like GE Money are now brought under the Act.
§ The Act restricts loans to borrowers who earn annual salaries of between $20,000 and $30,000 to no more than two times their monthly income.
§ Those with annual pay of below $20,000 can have access only to unsecured loans of not more than $3,000, with the annual flat interest capped at 18 per cent or an annual effective interest rate of about 30 per cent.
In this bracket, GE Money offers unsecured loans to those earning a minimum monthly pay of $1,600 or $19,200 annually.
§ For individuals who earn between $30,000 and less than $120,000 annually, banks can now extend a credit limit of up to four times the individual's monthly income. This credit limit would be the combined limit for credit cards and any unsecured lines of credit provided.
§ There is no cap on the unsecured loan amount for those earning at least $120,000 or with net personal assets of $2 million.
§ The new rules contain exclusions for certain types of loans such as those for business purposes, medical treatment, study and renovation.
§ Banks are no longer allowed to send unsolicited offers of unsecured credit facilities to customers. This means that lenders must not grant a loan or send any article or document which enables a loan, without a request from the customer.
§ The terms of the loans have to be spelt out clearly in writing and acknowledged by the borrower. They include the rate of interest, basis of interest calculation, date when interest is credited as payable, fees charged, frequency of instalment, rate of interest on late payment, and the basis of late interest computation.
§ Lenders have to conduct comprehensive checks with the credit bureau before granting each new credit card, charge card or unsecured credit loan.
The changes mean that credit is now more easily available to those who are in the $20,000 to $30,000 income bracket. This offers consumers greater flexibility and more options in managing their cash flow and finances.
On the flip side, borrowers may become complacent and enter into transactions with a false sense of security, said GE Money chief executive Rahul Gupta.
Before you sign...
Financial experts say you should consider these points before you take an unsecured loan:
§ Assess your credit position. Consumers should carefully assess what they need the funds for and review their ability to service a loan before applying for an unsecured line of credit, said Ms Wong Chung Yee, OCBC Bank's head of consumer unsecured lending.
Mr John Denhof, business director of credit payment products at Citibank Singapore, says the following are warning signs that you have stretched your credit limit too far:
- You are unable to afford the item if you have to use cash
- You have started to depend on cash advances to pay basic living expenses
- You can afford to pay only the minimum sum on your credit facilities
- You are hedging, that is, borrowing from one creditor to pay another
- You are using more than 35 per cent of your take-home pay to service your debts
- Your debts are greater than 50 per cent of your total assets
§ Choosing the right unsecured loan. Whether it is a line of credit or a credit card, choose the type of unsecured credit that best meets your needs, said Mr Denhof.
For example, a line of credit gives liquidity, cash on demand and lower interest rates than credit cards. It also allows users to bridge short-term cash needs and is a source of unexpected emergency funds.
On the other hand, credit cards are convenient and come with perks like air miles. If these extras are valuable to you, credit cards make a lot of sense.
One way of managing the amount of one's outstanding loans is to use cheaper loans to save on interest payments and manage cashflow needs, said Ms Wong.
At the same time, be aware that multiple unsecured loans may cause you to lose track of how much you have spent each month.
Whatever type of unsecured loan you choose, Mr Denhof suggests the following checklist:
- Read the terms and conditions
- Shop around for the unsecured loan that best meets your needs
- Compare the interest rates
- Review all the additional charges, such as administrative fees and late payment interest charges
§ Comparing interest rates. Be alert to the type of interest rate that is being advertised. Some ads refer to effective interest while others refer to monthly interest rate rather than an annual interest rate.
The effective interest rate is interest calculated on the declining principal balance over the tenure of the loan. Flat or simple interest rate is calculated by applying the flat rate on the original principal amount multiplied by the tenure. The principal balance is assumed to be the same throughout the life of the loan.
Do make sure you are comparing like with like, said GE Money.
§ Spend what you have, borrow what you need. It is prudent to spend only the money you have. Ms Wong suggests giving yourself a spending budget and sticking to it. This should be a budget backed by cash on hand.
When it comes to loans, ensure that you can afford the loans and are comfortable with the monthly instalments and the tenure, said Mr Koh Kar Siong, POSB's managing director and head of deposits, cards and loans.
At GE Money, borrowers are prompted to consider their other monthly payment obligations, which cover both fixed items like housing and car and variable ones such as expenditure on food and clothing, and to work out the comfortable disposable income levels after meeting all these obligations.
§ Consider loan insurance for protection. Citibank, GE Money and POSB offer loan insurance for their unsecured loans. The insurance will pay the outstanding loan amount if the borrower suffers total permanent disability or dies.
In addition, GE Money offers credit insurance against job retrenchments through its Payment Protector Plus Insurance product. The fee is 1.85 per cent of the monthly instalment. So if a customer's monthly instalment is $250, the fee would be $4.63 a month.
Whether you are a low- or high- income earner, Mr Ben Fok, chief executive of Grandtag Financial Consultancy, cautioned that taking a loan is a double-edged sword. It can help you with your situation but, if used wrongly, can also bankrupt you.
'While an unsecured loan is the fastest way to have cash in hand to cover any immediate needs, borrowers should always ensure they have the ability to repay the loan,' he said.
'Always do your budgeting first before getting into such loans. And if you have to, select the desired loan tenure so that it is easier to plan your budget.'
What's Available
Here are some unsecured loan packages which cater to lower-income borrowers.
The GE Money product is open to those earning at least $19,200 a year. The other three require an annual income of at least $20,000.
§ Citibank Ready Credit SmartCash
This new product offers customers the choice of a credit line, an instalment loan or a mix of both.
Among other services, it offers a 24/7 doorstep cash delivery service, a free chequebook and ATMs island-wide, as well as 820,000 ATMs globally.
The annual effective interest rate for the credit line is 20.95 per cent, with a $90 annual fee. If the customer misses the minimum payment due, the late payment fee comprises 30 per cent of the past due amount subject to a minimum of $45 and a maximum of $80, plus a late payment interest charge.
For the instalment loan, the effective annual rates are 16.01 per cent, 17.95 per cent and 19.37 per cent for the 12-month, 24-month and 36-month loans, respectively. There is no annual fee.
§ GE Money EzyCash
EzyCash has been around since 2005 and is available at 24 SingPost branches and the main GE Money branch in Clemenceau Avenue. There is a face-to-face interview before loans are approved.
The annual effective interest rate is in an average range of 14 to 22 per cent, depending on the loan amount and tenure. There is no annual fee. The late payment fee is $40.
§ POSB Loan Assist Plus
Borrowers must buy an insurance cover at 1 per cent of the approved loan amount. The cover will pay the outstanding loan amount in the event of total and permanent disability or death of the borrower.
For one-year and two-year loans, the annual effective interest rates are 17.97 per cent and 18.16 per cent, respectively. For three-, four- and five-year loans, the effective rates are 19.57 per cent, 19.19 per cent and 18.80 per cent, respectively.
The product has no annual fee but there is a late payment fee of $60.
§ OCBC EasiCredit
Customers can have immediate access to cash with OCBC's one-hour express approval service. The credit line is accessible through its 437 ATMs, cheques, Internet banking and mobile banking.
The annual effective interest rate is 29.8 per cent a year with an $80 late payment charge and annual fee of $80.
No comments:
Post a Comment