Famous American billionaire Warren Buffet advises people to spend what’s left after saving – not save what might be left after spending.
But to the modern-day consumer, the temptation to spend is huge with all the advertisements and promotions by marketers. So great that spending always wins the duel with saving. Consumers are squandering money, living out of their means and sinking deeper into debts.
Some have blamed their credit cards for their benevolent behavior while others keep going back for more personal loans year in year out. What many don’t realise is that a personal loan could actually be a lesser evil compared to a credit card.
Here is a simple analysis:
On the Red Corner: Credit Card Debt
When it comes to credit cards, Singaporeans are huge fans. Some have as many as four with the first being a cashback card set for generalities like utilities and groceries.
The rest could be used for basically everything; paying rent, shopping at the mall, car hire, medical bills, you name it. So, what is it about credit cards that have enticed consumers to sign up and spend?
Convenience and safety: Credit cards are widely accepted at many stores meaning people don’t have to dash around town with wads of cash weighing them down. Purchases can be completed with a swipe within minutes. Moreover, with credit cards, they reduce the risk of daylight robbery.
Perks and Rebates: Some of the leading cards in Singapore may return as much as 8% (sometimes even more) of the user's spending which by global standards is extremely generous. All these rebates, cashback or points earned are huge temptations for fellow Singaporeans.
For frequent travelers, the offers are similarly unselfish with Singaporeans able to redeem their accumulated miles bountifully for air tickets to use on future travels. Consumers also enjoy amazing discounts at petrol stations, when dining, and more. With all these benefits, it is no surprise that most Singaporeans have at least one, if not more credit cards.
But at what cost?
Huge Transaction Fees: Where do the rebates and perks come from? Unknown to Singaporeans, the banks have some of the highest processing fees. But consumers cannot note since they are simply included within the prices quoted by participating restaurants, supermarkets, airlines, and shopping centers. On the same note, the Island’s credit card companies make a significant profit spread on Forex rates each time holders use them overseas.
Exorbitant Interest Rates: Credit cards have extremely high interest rates sometimes rising to as much as 30% per annum on cash advances. Even on purchases, the average is 25% which is quite frightening for ardent users.
A Tendency to Overspend: Having credit cards create the illusion that they have more money to spend. With such convenience, consumers hardly spare a second thought before pulling out the next card - once the first’s limit has been exhausted.
For example, they spend on entertainment centers (movies, pubs, etc.) as well as on lavish dinners without really giving a hoot. This is usually the main reason why people end up in credit card debts as it gets tough to control their spending.
On the Blue Corner: Personal Loans
As most people would frown upon the term personal loans and mentally link it with loan sharks and pig heads, rest assured that these loans are legal and in certain situations, necessary.
Personal Loans are basically unsecured loans. This means that they are not supported by collateral such as houses, like in cases of mortgage loans and are thus also quite popular. The existence of alternative private money lending companies also makes personal loans readily available.
But when do personal loans make economic sense?
Cheaper Interest Rates: Interest rates for personal loans are definitely lower compared to the enormous interest rates of credit cards. This makes acquiring a personal loan better especially if consumers are making large purchases. The interest rates for personal loans are usually fixed, unlike credit cards whose interest rates keep varying from time to time as the due balance increases making a giant snowball of debt in no time.
Less Impact on credit score: Credit scores are numerical representations of a person’s trustworthiness in debt repayment and is usually used by lenders. Personal loans impact credit scores less than credit cards because of their lower interest rates and fixed payments minimize the risk of default.
In comparison, opening too many lines of credit on the card and failing to pay on time will eventually lower one’s score much faster.
Bigger Loans: Big-ticket purchases, such as homes or cars need higher amounts. Credit cards spending is usually capped and once exhausted, there’s no way out until the following month. Thus, such huge figures are most likely to come from personal loans.
More flexibility terms: By their very nature, personal loans provide greater flexibility. The borrower can engage the banker on terms such as the rates and the tenure - something unheard of on credit cards.
More Requirements: Getting the personal loan is pegged on the ability of borrowers to meet the slightly more requirements including a minimum annual income and a qualifying credit rating.
Why Personal Loans Might Be Better
Looking at the two competing options closely, it’s clear that personal loans could be much better and cheaper than credit cards - but for a few cases;
Credit card interest rates have been in double digits for long making credit cards only good for smaller purchases and convenience shopping which must also be done in moderation. Should one use their credit card for higher loans - which isn’t always possible due to the limit caps - they must pay them off in one month (again not easy) lest it brings their credit score tumbling down.
Conversely, thanks to their lower and fixed interest rates, personal loans are excellent for long-term spending. Singapore rates for personal loans are currently averaging between 8% and 14% per annum. Plus, one can get gigantic advances and pay for tenures as long as they may wish.
When to Go for a Personal Loan and Tips Before Getting One
Before applying for a personal loan, people should always consider if it’s the best option for them. Getting a loan is a major decision and a form of financial commitment. Sure, personal loans are cheaper than credit card loans but they still come at some relatively high costs.
Here are some tips to help those considering personal loans;
1. Ability to repay: One needs to be sure of their finances and capability to accommodate the repayments. That’s crucial since defaulting on the loan can damage one’s credit score, effectively causing pain down the road.
2. Consider alternatives for funds: Other funding options like family or friends could cost even zero and are very friendly. People with a good credit history and other existing banking relationships can also help evaluate other offers from their bank, lending companies or the credit union.
3. Borrowing to consolidate debt: For those searching for fixed monthly payments and at affordable rates as a way of managing their existing debt, personal loans could offer a superb route out of debt.
4. Self-discipline: To repay personal loans, individuals are expected to have top class financial discipline. In some cases, people are forced to make personal sacrifices to afford the installment. A budget could also be needed to help ensure timely payments.
5. Choose the best tenure: The longer the loan tenure, the higher the eventual loan costs. People should strive to repay the loan as soon as they can, but at a pace that they are comfortable with. This will lower the total cost of their borrowings.
6. Negotiate interest: A borrower can bring the interest costs even further down by presenting a compelling argument for lower interest rates. This is possible when getting personal loans and the final interest rate for each applicant will differ depending on their situations. Unlike credit cards where banks impose rates without consulting, lenders are willing and ready to make adjustments to satisfy their borrowers.
The colossal interest rates are slowly draining users of credit cards dry and mostly without their knowledge. In addition, cards have been blamed for the rise of the seemingly spend-happy society in Singapore with the increase in debt-ridden people.
On the other hand, personal loans have fixed interest rates and are thus more affordable especially for bigger purchases. They are a safer and more stable source of extra cash. Plus, consumers have to meet certain requirements before securing these types of loans which discourages random splurging.
Thus, Singaporeans should not be impulsive and take some time, weigh their options and consider the most comfortable source of loan for themselves.