Living in Singapore is like living in any other country, and with a new home in mind, you might need extra cash. Some of the best options to resolve your financial needs include home and personal loans.
The modern-day world moves, thanks to loans that help us resolve our financial needs. Education, medical bills, studies, travel, and building & buying a new home are just but a few of the reasons people need loans from time to time. There are many types of loans, including home equity, personal, and home loans, and each has its requirements and terms which differ from the other. Knowing the terms, requirements, and interest rates is critical since they make a difference in the convenience of the loans and the sum of repayment that you will make. Focus on this article and understand how personal and home loans work in Singapore and how they differ from other loans.
Just like the name suggests, home loans are those a person takes to build a house. While it may sound nearly the same as the home equity loans, another class of loans in Singapore, the two are completely different. Of course, they share the same collateral, your house, but they are different from each other. When a lender gives you a home loan, you must use the money to buy or build a house and cannot use it for any other purpose other than the house. On the other hand, although it has a house as the collateral, a home equity loan is not necessarily tied to the house. In fact, as you take the loan, you are not inclined to reveal the purpose of the loan, meaning that you can use it for anything you have in mind.
Personal loans share one characteristic with home equity loans; you don’t have to reveal what you will use the money for, even if it’s for debt consolidation. Unlike home loans solely used for mortgage purposes, personal loans can help you resolve any financial issue, including debt consolidation. In addition, while a home loan has a house as the collateral, personal loans do not look at your house for compensation when you default but instead, solely rely on your income.
What are the main differences between home and personal loans?
Home and personal loans have many differences revolving around terms, requirements, and interest rates. Here are the main ones;
Home loans have a house as the collateral, while personal loans do not bank in houses.
You must be ready to bank on your property when you want to take home loans since your house will need to be collateral. This helps repay the loan in case you default. In contrast, personal loans do not bank on your property. Instead, such loans look up to your income to repay them, hence the reason you must have an annual income of at least $ 24,000 to qualify for them.
Home loans are secured loans and less risky than personal loans
Since home loans have borrowers’ houses as collateral, they are regarded as ‘secured’ loans, and lenders view them as less risky. In case the borrower cannot repay them, the lenders auction the property and recover their money. On the other hand, personal loans are non-secured loans since they don’t have collateral. Like any other country, Singapore faces economic challenges, and one’s financial status can change anytime.
Home loans are calculated based on your property value, while personal loans have a $250,000 limit
The other key difference between home and personal loans is the amount the lenders can give the borrowers. For instance, you can know how much home loan you can have by getting 75%- 80% of your property value since that’s how most banks and lenders in Singapore do it. However, because personal loans have nothing to do with your house, most banks use a fixed limit of $250,000.
Home loans are given on longer terms than personal loans
The period of repayment for home and personal loans differs widely in Singapore. Home loans are long-term loans, lasting 30-35 years of repayment. Although most lenders will have a lock-in period of at least three years during which defaulting leads to heavy fines, you will have at least 30 years to repay the loan fully. However, personal loans are short-lived, having at most 7 years of repayment, failure to which heavy fines will apply.
Home and personal loans have different interest rates
Since the period of repaying home and personal loans differ, their interest rates also differ. For instance, home loans paid over an extended period, have low-interest rates of 2%-3% per annum, depending on the bank or the lender. In contrast, personal loans are considered risky and non-secured, hence the heavy interest rates of 8% EIR over the seven years.
Home vs. personal loans in Singapore; which one is better?
Having understood what home and personal loans are and the major differences between them, you might want to know which one is better than the other. Interestingly, it’s easier said than done since it all depends on your circumstances. Still, the following three factors can help you choose between the two loans;
- Tenor loans; in Singapore, most lenders promote attractive packages and low-interest rates, but these do not come without hidden payments. Therefore, while a loan may have low interest rates, the longer it extends, the more you will pay.
- Your needs; most people consider home loans when they want large sums of money beyond the $250,000 limit offered by personal loan lenders.
- Miscellaneous costs; all factors kept constant, and individual banks differ in miscellaneous costs. For instance, the lock-in periods, processing, and early/late repayment costs differ, ultimately affecting your total repayment.
- Interest rates; if other terms are the same for two or more lenders but the interest rates differ, you will likely ride on the lower interest lenders.
Singapore offers its citizens different loans, including home and personal loans. Home loans are long-term (repaid for 30-35 years), have low-interest rates, and bank on the property as collateral. In contrast, personal loans are short-term (last 7 years), have high-interest rates, and bank on the borrower’s income. The interest rates, your needs, and miscellaneous costs should inform your choice in choosing which loan to take.