In 2012 and 2013, the rules regarding home loans changed a lot. One of the biggest is the rule regarding age, and how much you can borrow. It’s no longer just about your loan tenure, but how old you’ll be at the end of the loan tenure – cross a certain threshold, and suddenly your downpayment balloons to 40% or more. Here’s something to clear up the confusion:

What is the relationship between loan tenure and age?

In October 2012, the Monetary Authority of Singapore (MAS) passed two new loan restrictions.

First, your loan tenure can never exceed 35 years. Also, if the loan tenure would go beyond 30 years, the amount you can borrow falls to 60% of your property value (or 40%, if you also have an outstanding home loan).

Second – and this is the big one- if your loan tenure plus your age exceed 65, you can also only borrow 60% of your property value (or 40%, if you also have an outstanding home loan. For example:

Say you are 45 years old this year, and you want to buy a condo for $1.6 million. You ask for a loan tenure of 25 years. This would take you past the age threshold (45 + 25 = 70), so the maximum you can borrow for the condo would be S$960,000. That means you face a down payment of S$640,000.

This rule was put in place to prevent over-leveraging. MAS doesn’t want a lot of Singaporeans who are past the retirement age (65), who are still saddled with mortgages.

What happens if more than one person is borrowing?

Yup, that’s pretty much what everyone started shouting about. So in 2013, this issue was also cleared up, with a new system to determine the average age of all the borrowers.

(Before you ask, no, it’s not adding all the ages together and dividing it by the number of people. We wish it were that easy).

When there’s going to be more than one borrower, the first thing to do is eliminate the borrower(s) with no income. No matter how much cash they might have, they can’t factor into the equation if they have no income.

When that’s done, the remaining borrowers use an Income Weighted Average Age (IWAA). Here’s what the formula looks like, assuming there are two borrowers:

IWAA = (Age of borrower A x monthly income of borrower A) + (Age of borrower B x monthly income of borrower B) / combined income of both borrowers

For example, let’s say there are two co-borrowers for a condo. This is James, and his wife Anne. 

James is 37 years old, with an income of S$4,000 per month. Anne is 41 years old, with an income of S$5,500 per month. So we get:

(37 x 4000) + (41 x 5500) / 9500 = 39.3

The IWAA of James and Anne is 39. To get the maximum possible loan for their condo*, the longest loan tenure they can have is 26 years.

(*80% of property value or price, whichever is lower)

I need a shorter loan tenure, and it’s driving up the monthly repayments!

First, look on the bright side. We know it’s unpleasant, but at least you’ll be done paying for your house sooner.

Second, you can still try to keep the price low, by finding the best interest rates. For example, Standard Chartered’s 3-Month SIBOR loan is only 1.26% for the first year. A lower interest rate means smaller monthly repayments; so if you’re stuck with a shorter loan tenure, compare loans to lower your costs.

This article was first published on GoBear Singapore blog.

If you are currently saddled with a home loan and are often scratching your head when terms like “repricing” or “refinancing” are being thrown casually across the dinner table by your more financially-savvy friends, fret not, because after reading this, you’ll soon realise – it’s not really rocket science. 

Essentially, repricing your home loan refers to the switching of your existing loan package to a new one with the current bank (that is offering you your existing loan); while refinancing refers to the switching of your existing loan package to a new one with another bank. 

To draw an analogy to telco services, repricing and refinancing is kind of like the difference between switching to a different mobile plan being offered by your current mobile service provider (repricing), versus switching to a mobile plan offered by another service provider altogether (refinancing). 

While different, the goal of repricing and refinancing is to optimise the terms of your home loan – by lessening not only the total amount of interest you pay, but also the corresponding monthly instalments due. 

Whether to reprice or refinance, ultimately depends on which option offers the most savings – and this may not necessarily be the option that offers the lowest interest rates. There are still other incidental costs and fees to consider. 

Read on to find out more about the common costs and fees involved in repricing or refinancing your home loan. 

Repricing costs and fees 

Repricing usually involves a one-time fee of up to or around $800 (sometimes called a conversion or administrative fee). 

For some home loans, like those for Building-Under-Construction (BUC) properties, repricing fees may be waived in some instances – for example, if repricing is requested because of an increase in the interest rate, or if requested within 6 months of the Temporary Occupation Permit being issued. Be sure to check your loan agreement terms for any such fee waivers, and seek the necessary clarifications with your bank.

Other than repricing fees, there are typically no other charges involved – aside from having to spend the time (well, time is money) contacting your bank to initiate the repricing. 

The whole repricing process generally takes between four to six weeks to complete, so it is advisable to get the process started as soon as the window for any free repricing is open; or once you find that the savings from a repriced interest rate package more than offsets any repricing fees chargeable. 

Refinancing costs and fees 

Even if you come across more competitive interest rates being offered by another bank, which look too tempting to refuse, you might want to hold your horses and first consider whether the refinancing costs and fees will upset your game plan. 

1. Prepayment penalty 

If you are thinking of refinancing your home loan while still within your lock-in period with your current bank (which can typically range anywhere from two to five years), be prepared to face a prepayment penalty on the outstanding loan amount. 

This prepayment penalty is also sometimes known as a “full redemption penalty” (because you are essentially borrowing from another bank to fully redeem your existing loan with your current bank), and is usually chargeable at 1.50% of the outstanding loan amount. 

Because such prepayment penalty can be quite significant, you should generally not consider doing a refinancing during your lock-in period. 

That said, given that banks usually require a written three months’ notice of your intent to refinance with another bank, and that the whole refinancing process with the new bank takes around the same time anyway, you also shouldn’t wait until the lock-in period is over before looking around and getting the refinancing process started. If you can, get the balling rolling three to six months ahead of your lock-in period ending.  

2. Cancellation fee

For home loans relating to BUC properties, where monies are disbursed progressively according to each stage of the property construction, choosing to refinance your home loan at a point when the full loan amount has not yet been disbursed, will usually attract a cancellation fee. 

Typically, cancellation fees range from 0.75% to 1.5% of the undisbursed portion of the loan. Some BUC property home loans may also impose a minimum cancellation fee, for instance, stipulating a fee of 0.75% of the undisbursed portion or $1,000, whichever is higher.

Do note that such cancellation fees may be incurred on top of any prepayment penalty, should you choose to refinance during your lock-in period. 

3. Clawback costs 

If your current home loan was provided or previously refinanced with some deal sweeteners such as legal fee subsidies or valuation fee subsidies, refinancing it might trigger some clawback charges if you are still within the clawback period. 

Just like how the prepayment penalty applies during the lock-in period, any subsidies you have enjoyed on your existing home loan will have to be paid back to your current bank should you refinance within the clawback period. Be sure to look out for such clawback terms in your loan agreement, particularly to see if you are still within any clawback period. 

4. Legal fees and valuation fees

As refinancing ultimately involves a new bank having to go through the paperwork again to approve your loan and evaluate your property’s value, refinancing with the new bank will also incur legal fees and valuation fees.

Legal fees are paid to conveyancing lawyers who will draw up and lodge the necessary mortgage documents. The bank you are refinancing your home loan to will usually appoint one of the law firms on their panel. Legal fees can cost anywhere from $1,800 to $3,000. 

The valuation fee, on the other hand, is paid to a professional for assessing the property’s market value – depending on the size/value of your property, this can range between $150 and $700, unless otherwise specified. 

When considering which bank to refinance your home loan with, legal fee and valuation fee subsidies are often dangled by the different banks to defray your refinancing costs. Take advantage of these to reduce your out-of-pocket expenses. 

For easy reference, a summary of the common costs and fees involved in refinancing are set out below: 

Conclusion

Even if lower interest rates offered by other banks can seem enticing at first glance, it generally only pays to consider refinancing your home loan outside of any lock-in periods, clawback periods, and if doing so will not incur any cancellation fees on your part. Otherwise, you are probably better off just repricing your home loan. 

If you think you’re ready for some refinancing, why not head over and compare some home loan options with GoBear?

This article was first published on GoBear Singapore blog.

Planning on purchasing your first HDB soon? It’s an exciting feeling to be able to move into your first apartment.

However, it can be a big financial commitment and you may find it difficult to save up enough funds on your own to make this purchase in one lump sum.

So if you’re in search of some financial help to get you to this next step, there are two types of loans to consider.

These loans are the HDB Concessionary Loan (a.k.a. the HDB loan) or a traditional bank loan. Whether you decide on one or the other will come down to a few important factors to consider.

Differences between HDB loan vs bank loan

So how do you decide between an HDB loan and a bank loan? You might consider the following factors:

Type of property

The HDB loan is only available to those purchasing HDB property and does not apply for any other type of residential property. 

If this is your first HDB property, there are many advantages to choosing an HDB loan over a regular bank loan.

Flexibility

For one, HDB loans provide more leniency in the event you can’t make your payments on time, with a current penalty rate of 7.5% per annum. Bank loans typically offer penalty rates higher than this, but the exact amounts vary amongst individual banks. 

Maximum amounts

The maximum amount for the loan goes up to 90% of the purchase price of the new HDB property, or 90% of the resale price or market valuation in the case of resale flats.

Minimum amounts

There are also no minimum amounts set for an HDB loan so you’ll only need to borrow what you need, avoiding higher payments in interest. 

Down payment amounts

On top of that, the down payment for an HDB loan is lower than a bank loan at 10% in cash or CPF funds. Meanwhile, a bank loan requires 5% in cash, plus 20% in cash or CPF Ordinary Account (OA) funds. 

However, there are drawbacks to HDB loans you’ll want to consider.

| See also: How does TDSR affect your home loan application? |

Interest rates

First off, interest rates are considerably higher than other bank loans at 2.6%. Generally, bank loans range between a lower percentage of 1.3% – 2.5%.

This is the most important factor to consider when choosing an HDB loan. You’ll need to make sure you can manage your repayments on time to avoid racking up the interest fees. 

At the same time, it is important to understand that although HDB loan interest rates are generally higher than bank loans, HDB loan interest rates are not subject to fluctuations in the market and are currently fixed at 2.6%.

Meanwhile, bank loans are subject to market fluctuations whether you opt for fixed or floating interest rates which can increase or decrease. This means that just because you sign up for a home loan with an interest rate of 1.5%, for example, this does not guarantee this is the rate you will have to eventually pay for the duration of your loan. It may be higher or lower. 

Mortgage servicing ratio

Apart from that, HDB loans have a set mortgage servicing ratio (MSR) which only allow you to use 30% of your monthly income to service your loan. Hence, there may be a lack of flexibility when it comes to how long it takes to pay back your loan compared to bank loans where monthly repayment amounts can be higher. 

Eligibility for an HDB loan: 

• At least one owner is Singaporean 
• You are applying for a loan to purchase an HDB flat
• You must not have taken 2 or more housing loans from HDB previously
• You must not own any private residential property or disposed of one within the last 30 months
• Your income falls below the set income ceiling of S$12,000 (or S$18,000 for extended families)

Bank home loan

Compared to an HDB loan, a regular bank home loan generally has fewer restrictions and less criteria in terms of eligibility. 

You don’t need to be a Singaporean citizen to apply for a home loan with a bank, nor is there an income ceiling which means you can apply even if your income exceeds S$12,000. 

However, keep in mind that while HDB loans do not have early repayment fees, certain bank loans may be fixed and require you to pay exit fees or early termination fees for home loans. So if you’d like to avoid extra interest paid, an HDB loan might still be the better option for you. 

HDB loans vs Bank loans

Conclusion:

We hope we’ve helped you decide whether an HDB loan or bank home loan is right for you. To help you further, why not check out GoBear’s nifty comparison tool for side-by-side rates of the best HDB and bank home loans available in the market.

Consider us your dedicated mortgage partner to help you find the best home loan rates in town, and find HDB or bank home loans with interest rates as low as 1.43%! 

This article was first published on GoBear Singapore blog.

If you’ve been thinking of buying a home for investment purposes, you’ll want to consider Singapore’s TDSR housing policy before you take that leap. 

While home buying is an option of long-term investment, it’s a big step and purchase decision so you’ll want to cover all your bases with research as you would with any big decision. 

One of the most important considerations is finding out what your Total Debt Servicing Ratio (TDSR) is. 

Not sure what this is? Don’t worry, we’ve got you covered with what you need to know about the policy. You’ll want to know how it could affect you before taking out a home loan. 

What is TDSR? 

The Total Debt Servicing Ratio (TDSR) is a housing loan policy which was first introduced by the Singaporean government in 2013. 

The reason it was introduced was to ensure homebuyers were borrowing within their means and to prevent them from taking out too many loans that they cannot service, which would lead them to fall into unhealthy debt. It was also a cooling measure for the rising property prices.

The TDSR essentially limits the amount any Singaporean can borrow from a bank. According to the policy, an individual can only take out a loan where his aggregate monthly repayments is not more than 60% of his monthly income.

It takes into account all types of loans owed to a bank including car loans, student loans, personal loans, credit cards, and of course, mortgages. 

How does TDSR work? 

The TDSR, unlike previous policies to curb over-borrowing, is strictly enforced by the government and applies to both individuals and banks. 

The 60% ratio is adopted by banks in their application process. If you apply for a loan and taking the loan would mean that your total monthly repayments exceed 60% of your monthly income, the loan will be rejected. 

Let’s say you’re currently servicing the following loans on a monthly basis with a salary of $5000 per month: 

• Car loan – $800
• Personal loan – $300
• Renovation loan – $600
• Credit card instalment plans – $400

Your current debts stand at $2,100 per month, which means that you can only take up another loan not exceeding $900 in monthly repayment (60% totals $3,000 in this case). 

But, how do banks keep track of your various loans? 

This involves the Credit Bureau of Singapore (CBS) which holds and consolidates all credit information of every Singaporean citizen. Using information about all your loans and credit behaviour, it generates a Credit Report for each individual. 

This Credit Report then informs other lenders and financial institutions about your creditworthiness and financial standing. Similarly, banks refer to CBS to determine whether to approve or reject a loan, including your mortgage.

Things you need to know about TDSR as a homebuyer 

1. A 30% ‘haircut’ on all variable income

If you have income which fluctuates month to month, this will be subjected to a 30% ‘haircut’. For example, if your variable income is $5,000 a month, then they’ll first take 30% of that which means $3,500. From that, your TDSR will be up to 60% of that, which is $2,100. 

This gives you less room to take on another loan, because your 60% cap will be significantly reduced. 

2. Mortgage Servicing Ratio 

If it’s a HDB resale flat or Executive Condominium that you’re eyeing, you’ll need to consider your Mortgage Servicing Ratio (MSR) in addition to the TDSR. 

The MSR is the limit of what you can spend on a mortgage based on your monthly income, which is set at 30%. So if your monthly income is set at $5000, the amount you can spend on your mortgage every month is capped at S$1500.

Between the TDSR and Mortgage Servicing Ratio, whichever capped amount is lower is the amount you’ll be allowed to spend on your mortgage. 

3. Exemption for owner-occupants 

If you’re an owner-occupant who is refinancing a home loan, the TDSR will not apply to you. That is to say, borrowers who have purchased the property for their own stay are exempted; the TDSR only applies to Singaporeans looking to buy properties for investment purposes. 

4. No more guarantors

With the TDSR policy, there are no longer guarantors for property loans. Prior to this, home loan applicants could secure a loan based off a guarantor’s salary.

This made it easier to get a home loan regardless of an applicant’s salary or debt-to-income ratio, which also means that the borrower was more likely to accumulate debt in the long run. 

Now, applicants can instead apply for home loans with a joint borrower, who is equally responsible for the repayment of the loan. The TDSR is then calculated based on the aggregate monthly income of both parties. That is to say, the amount that you can borrow will thus be higher with a joint borrower.

5. Exemptions to TDSR

All that said, there are ways to get around the TDSR rules. If you’re looking to invest in property, you could consider trying the following steps:

• You could commit to a debt reduction plan with your bank and commit to reducing your debt and the outstanding amount owed
• You pass a bank’s credit assessment

Knowing what you now know about the TDSR policy, you may still be keen to invest in property. And if you are, it always helps to find the most flexible and low-interest loan possible to keep your long term debt ratio low. 

To start searching for the best home loans out there, GoBear’s here to help! Compare your best options out there with our handy comparison tool. 

This article was first published on GoBear Singapore blog.

Buying a new home is an exciting affair, but also one of the most painful expenses you will have to make. For most of us, it is unlikely that we will be able to pay for everything in cash, so this is where loans come into handy (or you might say, even necessary).

Firstly, there’s the home loan that you need to get in order to pay for your house. Next, there are renovations as well, and renovation costs are much higher than what you expected. Even for a new BTO flat, everyone is quoting you within $30,000 and above, while a resale flat can set you back by $80,000 or more, depending on how old the house is and the extent of the repairs needed.

Let’s explore these loans further in detail to help you decide which and what to take.

Should I take HDB or bank loan for my house?

If you are buying a HDB flat and do not own any private property, then you are eligible for a HDB concessionary loan, as long as your monthly household income does not exceed $12,000 (or $18,000 for extended families). This is a benefit that only Singapore citizens can enjoy.

Two main reasons why Singaporeans opt for a HDB loan are:

1. They pay a lower downpayment of 10%, which can be funded using cash or CPF
2. You can switch to a bank loan anytime thereafter.

One of the biggest benefits for folks who choose to go with a HDB loan is that it solves immediate liquidity issues. Since you can borrow up to 90% of your purchase price for the house and pay the rest with your CPF, you can even end up not paying any cash at all! This is great especially for young couples who might not have spare cash lying around. 

However, the current financing rate of HDB loans are at 2.6%, which is significantly higher than the present interest rates that banks are offering.

If you choose to take a bank loan, note that:

1. You have to pay a downpayment of 25%, of which at least 5% must be in cash
2. You cannot switch to a HDB loan afterwards, but you can refinance with other banks later on.

The main benefit of bank loans over a HDB loan at this moment is that bank interest rates are much lower (1.8% to 2.1%), so you can save on the amount of interest you pay. But this option is only available for higher income-earners, or those who have spare cash accumulated from prior years of work.

Do note though, that the main risk with taking a bank loan is that the interest rates are subject to fluctuation, which means there could be a chance of you paying more than 2.6% (HDB’s rate) in the future if the general interest rate environment increases.

Read more about the differences between a HDB loan and a bank loan here.

If you need to take a home loan, remember to check and see if you can pair it with a high-yield savings account, such as DBS Multiplier or UOB One. 

Now that you’ve settled the money for your house, what about your renovation?

Should I take a renovation loan?

Ask any of your friends who have done their renovation, and they will speak of how they have had to pay a substantial amount within a short period of 1 to 3 months for their renovation. By the time your house is complete and ready for handover, you would have paid at least 80% (if not the full sum) of the total renovation amount.

With at least $30,000 for a simple BTO renovation project and $80,000 for a resale flat overhaul, most of us do not have that kind of spare cash lying around.

If that describes you as well, this is where a renovation loan can come in handy.

At 3% to 5%, the interest rate on a renovation loan is lower than a personal loan, and even lower than borrowing from your credit card.

You can choose to repay the loan over 1 to 5 years, and the usual maximum loan amount is 6 times of your monthly salary, or $30,000 (whichever is lower). However, note that you can only use this for your renovations and not towards paying for your furniture.

This includes areas such as:

• Electrical works and wiring
• Painting or wallpaper works
• Plastering of your walls or ceiling
• Flooring and tiling
• Carpentry
• Structural changes 

Once your loan is approved, the bank will pay your contractor the approved loan amount directly. 

If all this talk about loans is starting to worry you, do not fret! You do not have to complete all your renovation in one sitting – instead, focus on essential areas that require renovation works (eg. tiles, walls, kitchen and toilets) and leave the rest to another time. You can also forgo carpentry and go for furniture options from IKEA or JB instead to save more money.

Don’t forget to use the GoBear comparison tool to check which bank is offering the cheapest home loan!

This article was first published on GoBear Singapore blog.

In efforts to alleviate some of the economic fallout of COVID-19, the US recently announced the biggest reduction in its Federal Reserve interest rate since the 2008 financial crisis, which could still fall to zero or even the negatives within the upcoming months.

The fed rate cut, has, in turn, sent SIBOR into a steady drop of its own and at the time of writing this in June, the 1-month SIBOR rate stands at 0.25% while the 3-month SIBOR rate is 0.54%, a 10-year low for SIBOR.

These low SIBOR rates are great news if you’re considering a home loan because it generally means a lower home loan interest rate for borrowers.

But before you run off to apply for that home loan, you may be wondering what SIBOR is and how it affects you as a borrower.

Here’s a little breakdown of what you need to know about SIBOR and how it affects interest rates.

What is SIBOR?

The Singapore Interbank Offered Rate, known in short as SIBOR, is the median interest rate calculated among 12 local banks in Singapore. It’s used as a benchmark interest rate for lending between banks in the market.

The reason it’s such an important interest rate in Singapore is that many home loans in the country are pegged to SIBOR. It’s used as a reference rate to guide banks in determining how to price loans.

For example, a bank which offers a 3M SIBOR + 0.7% rate would mean that the bank is charging 0.7% in interest on top of the current 3-month SIBOR rate. 0.7% would be the spread or premium this bank is going to charge to borrowers on top of the SIBOR rate.

This would mean that over a period of three months, the median interest rate amongst 12 local banks would be the base SIBOR rate plus a 0.7% spread which is added on by the individual bank as its profit margin.

How does SIBOR affect home loan interest rates?

You may still be wondering what any of this has to do with you as a borrower.

Well, SIBOR plays a key role in determining interest rates, particularly for SIBOR-pegged loans. Banks determine how to price loans using SIBOR by using it as a benchmark rate, then adding a premium or spread on top of that which becomes their profit margin.

For example, with a 1M SIBOR + 0.4% rate, the benchmark rate, in this case, is SIBOR, which is not determined by individual banks but by the median rate offered by local banks. However, the bank’s spread, which is in this case 0.4% is determined by the individual bank and calculated according to its own parameters.

Hence, you can guarantee that when SIBOR drops, so do bank interest rates for loans they offer. And unless banks decide to adjust their spread in the interest of their profit margins, home loan interest rates are going to continue to stay low or drop even further.

Will interest rates continue to drop?

Using the 2008 crisis as an indicator, all signs point to yes given the current COVID-19 crisis.

On top of that, banks have thus far not reacted by adjusting their spread, meaning that home loan interest rates could continue to drop for the foreseeable future.

That being said, it’s unpredictable and banks may still end up adjusting their spread at some point, though it’s hard to say when.

What does this mean for you as a potential borrower?

Fixed-rate loans may not benefit

For those of you with fixed-rate loans which you’re still paying off, here’s the bad news. You won’t be able to benefit from a low SIBOR rate with your existing loan.

The whole premise of a fixed-rate loan is to lock you into the interest rate of the time of signing up for the loan, allowing you to avoid the risk associated with it fluctuating.

Because of this, you won’t be able to benefit from a dropping SIBOR rate. On the flip side, when SIBOR rates do eventually rise (which they certainly will at some point), you won’t be affected by that either.

For SIBOR-pegged loans, on the other hand, this presents a great opportunity for you to reap the benefits of low-interest rates and save big on your future home.

Banks may still adjust their spread

Borrowers who were lucky enough to apply for a SIBOR-pegged loan last year will reap the most benefits since it’s now impossible for banks to raise their spread for their agreed interest rates last year.

However, if you’re about to sign up for a SIBOR-pegged loan, it’s definitely worth keeping in mind that banks could potentially raise their spread at some point.

This also means that the longer you wait to apply for a SIBOR-pegged loan at this point, the higher your lowest possible home loan interest rate is going to be as banks gradually increase their spread.

Longer-period loans may also be less beneficial since you’ll end up paying higher interest rates later on in your loan term once banks have increased their spread or SIBOR increases.

The government may intervene

Lower SIBOR rates could also potentially lead to a bit of a property buying frenzy in the market, and so it’s still a possibility that the government may intervene with cooling measures to prevent interest rates from dropping further.

Cheaper SIBOR-pegged home loans

However, for the time being, those of you in the market for a home loan will be able to take advantage of some attractive, low-interest rates for SIBOR home loans.

After considering and weighing your options carefully, you may decide that this is an opportunity you’d like to take for cheaper interest rates on your home loan.

In that case, now may be the time for the home of your own you’ve been dreaming of!

This article was first published on GoBear Singapore blog.

If you’re muddled with multiple loans and different monthly bills, chances are that your debts are snowballing and you might be struggling to keep up with the monthly repayments. While there are several solutions to resolve this, the short answer is for you to pick up proper money management skills.

For example, if you have difficulty controlling your credit card expenses, you should cut down the number of cards or even not use a credit card at all. If you have trouble keeping up with your monthly bills, that’s when GIRO and automated payments can come in handy. If you are overspending every month, start to use an expense tracker and stick to a strict budget.

However, if you’ve accumulated debts from multiple lenders and you’re barely able to pay off the monthly interest, that’s when you should consider a debt consolidation plan. 

What is debt consolidation?

You may have multiple unsecured loans with different banks – these include credit card bills, credit lines, or personal loans. Compared to secured loans that are backed by assets, unsecured loans usually come with higher interest rates. 

For example, interest rates on late credit card payments range from around 25.90% to 28.88% per annum while interest rates on unsecured lines of credits range from around 18.50% to 22.80%  per annum. *

Debt consolidation is the combination of several unsecured debts into one monthly bill. This consolidation simplifies your loan repayment to just one bank, and you’ll usually do that to get a lower interest rate and lower monthly repayment with this new bank.

Watch our video below to find out what exactly is debt consolidation and if debt consolidation is relevant for you.

How does debt consolidation work?

Debt consolidation works by having one bank pay off all your unsecured debts, and you owe money to that bank. When that happens, all your subsequent interest and payments will be made to that bank. 

Instead of struggling to repay over 20% in interest rates, you’ll enjoy interest savings with interest rates as low as 3.98% per annum, or an Effective Interest Rate of around 7.23% per annum.* With a lower interest rate, you can opt for a lower repayment amount that you are comfortable with, over a longer repayment tenure, up to 8 years.

*Interest rates are accurate as of July 2019. Look out for the Effective Interest Rate on debt consolidation plans, which comprises of the prevailing market interest rate and the additional bank interest rate, as this will be the full interest that you’ll be paying. 

A debt consolidation plan is a very specific type of personal loan that is meant to help those struggling with too many unsecured, high-interest debts. As such, you’re required to have interest-bearing unsecured debts that are more than 12 times your monthly salary. 

You’ll need to earn between $20,000 and $120,000 a year and have net assets of less than $2M to qualify for debt consolidation. Also, you’ll not be receiving the money with a debt consolidation plan; the bank will be paying off your unsecured debts directly. The terms and use of debt consolidation are very different from that of a personal loan or a line of credit. 

Not all debts can be paid off with a debt consolidation plan. For example, car loans and home loans are secured loans backed by your car and property respectively, so they cannot be included in your plan. Other types of loans that are excluded are education loans, renovation loans, medical loans, and credit facilities granted for businesses. 

Take note that debt consolidation is not debt elimination. While it simplifies the multiple debts that you need to pay, the fact is that you’re still in debt. So here are some tips on how you can manage your debts effectively if you choose to take up a debt consolidation plan.

How to manage your debts effectively

1. Choose a realistic repayment schedule

You might want to opt for a higher monthly repayment sum so that you can settle your debt quickly. However, you have to account for your other secured loans, your other commitments, and your day to day expenses. 

You do not want to over-commit to your debt consolidation plan and end up struggling to pay off other secured loans, or worse, struggling to get by your daily livelihood. That is an unsustainable lifestyle for the many years ahead.

Hence, it’s important to be fully aware of your commitments and to choose a sustainable repayment schedule rather than try to pay up as quickly as possible.

2. Manage your monthly expenses

This is when budgeting and financial planning becomes extra important. You have to be aware of what your commitments are, and which are the most important financial obligations. 

Which is of the highest priority? Is it repaying your secured home loan because you do not want the banks to repossess it? After listing down and prioritising your financial commitments, ask yourself how you can reduce particular expenses. 

For example, if you have an outstanding car loan, ask yourself if you need a car. What are the alternative means of transport, or if a car is necessary, can you opt for a cheaper car? If you’re spending a lot on dining out, can you cut down on dining expenses by choosing cheaper options or even preparing your meals at home?

If you look at each individual expenditure, it may not seem like a huge difference e.g. whether you choose to eat at a restaurant or cook at home. It is only when you plan out your finances entirely, will you be able to see what is most important to you and in which area of your lifestyle you’re willing to make a sacrifice so as to achieve your financial goal – in this case, to be debt-free.

3. Manage your credit cards

One of the surest ways to rack up credit card bills is to take up too many cards and spend freely on them. After all, you do not have to pay the bill until the end of the month, and even then, you can just pay the minimum repayment sum. That is when things can spiral out of control.

When you fail to make your credit card payments, the late interest fees are over 25% per annum. If you continue to rack up the bills and not pay off your existing debts month over month, this amount gets compounded. The result is that you might be unable to keep up with the repaying of your credit card debts.

While credit cards are useful to earn cashback and rewards, if you do not manage your credit card bills right, it might be wiser to have just one card or none. If you’re already overspending on that one card, it is advisable to look at your spending habits and start budgeting your monthly expenses. 

That is to say, set aside a sum every month for food, shopping, and other categories of expenses, and follow this budget closely. This way, you’ll be more careful about whether or not you’re exceeding your budget. If you exceed your budget for shopping this month, it’ll mean that you’ve to cut down on other expenses this month or skip shopping for the next few months. 

4. Compare and choose the most suitable type of loan

Besides the differences in interest rates across debt consolidation plans, it is important to look at other terms like the tenor (repayment period), the late payment fees, the maximum you can borrow, and whether there is a credit facility provided by the bank.

Interest rates vary across banks and tenor; generally, the longer the tenor, the higher the interest rate. There is also a limit to the amount of debt you can consolidate. Most banks will also provide a credit card facility up to one times your monthly income for emergency or sudden expenses. 

Depending on your needs and repayment schedule, you can easily compare across debt consolidation plans on GoBear by entering the total sum you need to pay, your expected repayment period, and your monthly salary. You’ll see a list of plans with details about your monthly repayment sum, the interest rates, and the total interest you’ll be paying. 

Compare and choose carefully. It’s important to find a plan that you can pay consistently in your goal to become debt-free.

This article was first published on GoBear Singapore blog.

In the past, if you couldn’t afford a car, the salesperson would just demand the free keychain back and kick you out the door.

These days, auto-dealers are more accommodating. This is especially so with the COE drop to $25,000 on 4 July 2018, the lowest in 8 years. 

Yeah, $25,000 is low. Try telling that to a car buyer in another country and you’ll be met with looks of shock and maybe ridicule.

So even if you don’t have that kind of cash, there are ways to pay for your car.

The only question you’ll need to ask is: is it worth taking car loan from an auto-dealer instead of a bank?

There are 5 main ways that auto-dealers and banks differ, in the way car loans are given out. These are:

Different interest rates

With few exceptions, bank car loans have a lower interest rate. The typical bank rate is between 1.88% to 2.7% per annum. Some bank loans have an interest rate of 3% but this is mainly for used cars as the interest rate on used car loans is always higher. Among auto-dealers however, rates are between 4% to 4.8% per annum.

For comparison sake, consider a car loan of $84,000. At 2.7% per annum, over a 7-year loan tenure, the monthly repayment is $1,189 per month. The total interest paid over seven years is $15,876.

Using an auto-dealer’s loan at 4.8%, over the same period, the monthly repayment is $1,336. The total interest paid over seven years is $28,224.

The auto-dealer’s loan would cost you $12,348 more, over the course of the entire loan.

Note that car loans use rest rates, in which the interest is based off the original loan amount. This means that interest repayments do not decrease as you pay off your loan. The “real” interest rate, or Effective Interest Rate (EIR), is around double the stated rate.

This means that an auto-dealer’s loan, at 4.8% interest, has an EIR of close to 9.6% per annum. At that point, even personal loans from the bank may be cheaper.

Approval process

Banks will review your credit report from the Credit Bureau of Singapore (CBS), and most have fixed standards for issuing loans.

Auto-dealers may be a little more flexible. For example, some of them don’t check your credit score, and only require the previous six months of your pay slips. This means they don’t see (or choose not to consider) factors such as past defaults, or late payment.

For this reason, many buyers consider auto-dealers to be a lender of last resort; they turn to the dealer’s “in-house financing” when the bank rejects their loan.

Extra fees and charges

Auto-dealers may include added fees and charges in the loan. A typical example would be a processing fee of $500, or late fees of $200. While banks may also have such fees, they tend to be lower than the auto-dealers.

For example, a bank loan often has a processing fee of under $200, and most late fees won’t exceed $150. Banks are also closely regulated, and are required to be more transparent with their charges.

An auto-dealer can be a bit sneakier. For example, an auto-dealer may offer you a lower rate of just 4% instead of 4.8% per annum; but the added processing fees, administrative charges, advance fees, etc. may add up to over $1,000, and you would end up paying the same amount anyway.

Tie-up packages

Some auto-dealers use “pass through” loans, in which they tie-up with a bank. These loans are actually just bank loans – the dealer is referring you to the bank.

For example, an auto-dealer may offer you a special interest rate of 1.88% with Bank X. If you were to approach Bank X directly, however, you may find the rate is 2.7% – you can only get the special 1.88% rate by buying through that specific auto-dealer.

In these specific cases, it’s possible for a bank loan to be cheaper when acquired through an auto-dealer.

Promotional deals

Sometimes, car dealers will give out rebates or lower interest rates for specific car models. This mainly happens as a result of sale quotas – when the car dealer needs to move inventory, they’ll spice up the loan with freebies.

An example would be an immediate $500 rebate, for buying a car with the auto-dealer’s loan. Of course, this isn’t a significant sum in the long run, given the higher interest rate. But it’s a type of promotion that you probably can’t find among banks as there are tight restrictions on the sort of incentives banks can offer.

Overall, due to the greater flexibility auto-dealers have, they can make their loans more alluring. Besides rebates, their promotions tend to have more lavish gifts (e.g. a whole year of free servicing).

But don’t be fooled by these types of deals – they seldom make up for the ultimate price difference, between a bank and auto-dealer’s loan.

Which should you pick?

If you can get a loan from the bank, use that first – even if the freebies are not as fancy, or the loan application is more troublesome, you’ll save money in the long run.

Where possible, look for tie-up packages to find competitive interest rates.

You should only use the car dealer’s in-house financing as a last resort. Even then, be sure to compare options among the different dealers.

This article was first published on GoBear Singapore blog.