How to Choose a Loan

From Financial Literacy Wiki

How to Choose a Loan

Taking a bank loan to buy big ticket items like your dream home and dream car is a very important decision that can great affect your personal financial future. Thus it is very critical for you to choose an appropriate loan to finance your purchase. The choice of your loans depends on many factors and they are written in detail below.

Interest Rate

Most borrowers consider interest rate as one of the most important criteria in choosing a loan. The lower the interest rate, the better it is for borrowers. Although competition among banks is keen in Singapore, they do not quote identical interest rates.

Banks can either charge a fixed or variable interest rate for their loans. Fixed interest rate loans are usually more attractive when interest rates are expected to rise. For variable interest rate loans varies with the prevailing market interest rate. They are attractive when interest rates are expected to fall in the future. Most housing loans in Singapore charge variable interest rates that depends on their board rates.

Margin of Financing

Margin of financing refers to how much of the purchased price of your asset can be financed by bank loans. If the margin of financing is 80%, that means the bank can only finance up to 80% of the value of the asset purchased. The margin of financing would greatly affect individuals who are tight on cash. The higher the margin of financing, the less cash an individual have to pay upon purchase.

Repayment Schedule

Most bank loan require a single payment or through installment payments. Loans that require a single payment at maturity are usually small, as compared to loans that are paid by installments throughout the life of the loan.

For installment loans, banks usually require borrowers to repay the loan in equal installments over the life of the loan. However due to great competition between banks, some banks allow borrowers flexible installment payments that fit the income stream of the borrower.

Loan Maturity

When choosing a loan, you should select the bank that allows the flexibility of stretching the maturity of the loan, preferably at any time of the loan. Most banks will offer credit of 30 years for hosing loans, but the actual maturity is determined on a case-by-case basis.

While stretching the loan's maturity can benefit borrowers if he/she is cash strapped but one must realise that the interest cost of borrowing increase significantly with the maturity of the loan. Thus it is also advisable that you choose a loan with the shortest loan tenure that does not compromise your ability to service the loan.

Collateral

An ideal loan would be one that does not require a collateral. But if that is not the case, one should choose a loan that allows a wider range of collaterals to be pledged than one with restrictive few. Most creditors accept collaterals that are easily liquidated and value exceeds the loan amount.

Processing Fees

Some banks charge borrowers a fee for processing a loan application. Thus avoid banks that impose high processing costs.

Penalty for Prepayment and Late Payment

To discourage early prepayment or late payment of loan installments, most banks would impose a penalty charge on borrowers. Do find out the terms and conditions and also the penalty charges if situations of prepayment and late payment arises.

Administrative Efficiency

Last but not least, the administrative efficiency of the lender is important. Some financial institutions are efficient in processing of loans and are responsive to the needs of borrowers. Choose one that do.