This article was updated by Rashida Arsiwalla on 23 March 2018.
A credit facility allows an individual to borrow a sum of money either in the form of a loan, or a ‘line of credit’ (like a credit card). The terms under which the borrowing takes place differ – while loans allow an individual to borrow a sum of money at one go, a credit card allows them to withdraw cash with a credit limit through the cash advance service as and when they need it.
Here are some of the commonly used credit facilities in Singapore.
A credit card is an example of a ‘line of credit’ facility that is issued by a financial institution. It allows the user to pay for purchases by borrowing a limited amount of money from the card issuer each month. The latter pays for the purchase on the user’s behalf, who then has to repay the amount at the end of each month.
If a credit card user repays the entire amount owed at the end of each month, he wouldn’t incur any interest. However, if he only pays the minimum required amount, he would have to pay interest on the pending amount at a later date. While credit is easily available to the user, credit card interest rates are usually quite high at about 25% a year.
The card issuer will assess your ability to repay your monthly credit card bills before deciding whether to accept your application and what credit limit to set for you. Generally, the credit limit is up to four or six times your monthly income.
An education loan is meant to help those who wish to pursue some form of education but are unable to afford it. If you are planning to study locally or overseas, there are various study loans offered by banks in Singapore where you only start repayments after graduation.
Although banks have different ways of categorising education loans, some of them make a distinction between local and overseas education, and the loan repayment terms – such as period of repayment and interest rates – vary accordingly. The average tenure for a study loan is 8 years, but could go up to 10 years depending on the bank.
However, given that these types of loans are targeted towards those who may not have a steady stream of income, some banks such as OCBC and DBS offer loans where you don’t have to pay interest during your period of study. The monthly instalment (if any) is also usually low for this type of loan.
In Singapore, such loans have a maximum tenure of seven years and are granted based on their open market value (OMV), which affects the loan-to-value (LTV) ratio you can get. For vehicles with OMV less than or equal to S$20,000, you can get up to 70% LTV, while for those with OMV greater than S$20,000 the LTV is capped at 60%.
Motor vehicle loans are commonly taken for buying a car in Singapore. In this case, the car is deemed as collateral against the loan, thus making it a secured loan.
HDB housing loans are offered by the Housing and Development Board (HDB) as well as the various banks in Singapore.
HDB home loans are fixed at 0.1% above the CPF OA rate, which currently stands at 2.6%. The lending rates for banks, on the other hand, are usually based on SIBOR (Singapore Interbank Offered Rate) and currently range between 1.3%-1.7%, but these may change at short notice.
The most important criteria to fulfil for an HDB home loan from a bank is the total debt servicing ratio (TDSR) and mortgage servicing ratio (MSR). To get a housing loan from a bank, your TDSR and MSR should not exceed 60% and 30% of your monthly income respectively.
Such a loan can only be used for actual renovations such as flooring, tiling, and wall painting, as well as wiring and carpentry work. It cannot be used for home furnishings such as electrical appliances or furniture. To get a renovation loan, you must own the house you wish to renovate.
These are short-term (6 months to 1 year) loans that are usually offered along with your home loan. If you need assistance on the initial cash down payment for your HDB or private property while you are still awaiting the sale of your existing property, you could opt for a bridging loan. It allows you to borrow up to 15% of the property’s purchase amount or its market value, whichever is lower. Bridging loans are not available to first-time home buyers.
Personal loans are mostly unsecured in nature. This means that the banks do not require collateral such as a car or a house in order to extend the loan to you, which is why the interest rate on such loans is also typically higher than secured loans.
Their unsecured nature makes personal loans attractive to those who require finances to meet short-term personal and business needs, because they do not need to worry about arranging collateral on short notice.
This feature of personal loans is also useful for those who need to pay medical bills. This can happen if your MediSave account can’t be used to pay for some medical procedures or if you have insurance but need to pay your bills upfront and be reimbursed later.
An overdraft is an extension of credit from your bank when your account balance reaches zero. It allows you to continue withdrawing money even if there are no funds in your account, which means funds can be ‘overdrawn’.
The interest rate for this facility is calculated at a percentage over the bank’s prime lending rate (the prime lending rate in Singapore ranges from 4.25% to 8.25% depending on the bank). You do not have to repay the overdraft within a fixed time, but the bank can choose to withdraw it from your account at any point of time.
An overdraft can be secured or unsecured in nature. In case of the former, you would need to pledge collateral in the form of property, shares or other valuables to get it from the bank. In case you are unable to pay your debt, the bank would sell off the pledged collateral to recover the payment.
An unsecured overdraft doesn’t require collateral. As per current regulation, an individual would have a maximum credit limit of two times their monthly income in case their annual income is between S$20,000 and S$30,000. If their income exceeds S$30,000, their credit limit would be four times monthly income.
Consider your financial situation before making a decision about the type of credit facility you choose. As far as possible, pick those that will allow you to manage your debt without being overburdened by it.