Taking up a loan might sound like something everyone would like to avoid, since it inevitably implies that you do not have enough to spend. But the truth is at some point in time, most people will take up a loan during their life time.
Think about it – how would you be able to afford to buy your own property if you do not take up a mortgage loan? Unless you are born with a silver spoon, it is absolutely common to do it. This is especially common in Singapore, from taking up a study loan to fund our ever-increasing university tuition to being able to afford one of the highest-priced public housing in the world, taking on debt is but something all-too-familiar with everyone.
If everyone does it, then why do some people have problems paying them off, racking up hundreds and thousands of dollars in interest payments, while others go on living up to their standard of living even if they have a debt-burden? The difference lies in the way of how they manage their debts. If you want to live comfortably while using the credit leverage for you to accomplish certain things in life, here’s 5 golden rules to keep in mind when taking up a loan.
Don’t take up a loan that you cannot repay
A simple rule to live by is to live within your means. This applies to borrowing as well. There is probably good reason why the government has set up a rule known as the Total Debt Servicing Ratio (TDSR) to help those taking up a mortgage not use more than 60% of their income on repaying debt.
In fact, a good rule of thumb or more conservative approach is to have your total debt under 50% of your net income. For personal loans and credit cards, you should not take up a loan that requires you to use more than 10% of your monthly salary to service the repayment. Officially, MAS has set a borrowing limit of 18 times of borrowers’ salary for unsecured loan, but borrowing at this amount can be a feat to repay, so only borrow what you need.
Keep your tenure short
While banks typically require one to take out a personal loan for at least a year, licensed moneylenders provide some flexibility in terms of loan tenure. This helps to keep your interest payments low and affordable, and gives you enough time to pay for what you need to.
Although some short-term loans may levy a higher interest compared to a long-term one, the overall interest amount tends to be higher in the long term, especially if compounding takes place. Thus, it may be more prudent to take a shorter term loan which you can repay quickly. You can use comparison sites like Onelyst to save time and get a competitive rate.
Don’t borrow to splurge
Make sure that you are borrowing for a good reason – be it to settle a large medical bill, to fund your studies or to buy something that is deemed a necessity. Borrowing to splurge on a designer bag is not responsible, neither is it to borrow in order to invest in a financial product that carries too much risk.
Make prompt payments
One of the most effective ways to ensure that your loan works well for you is to make your payments promptly. By making your payments promptly, you can keep track of how much money you need to set aside each month to service your loan, as well as ensure that you are not charged extra fees or interests.
Using Split-Payment Method
There are split-payment methods available for you to split the cost of your purchases. For example, you can buy your fashion products and pay over 6 months. Such interest-free split payment methods will be a good budgeting tool tht you can use.