Everyone is unique, so do their needs? Borrowers should understand the features of different loan products to select the “right” one. What are the choices among personal loans? How to calculate the interest? Which kind is most suitable for you?
Choose the right loans to suit different purposes
If this is your first time borrowing or if you prefer stability, fixed loan is relatively simple and more suitable for you. Fixed loan provides a fixed repayment period and monthly repayment amount, so borrowers can reduce the risk of going over budget. The most common fixed loan schemes include instalment loans, tax loans, credit card cash instalment plans, etc. Their repayment periods, loan amount limits and fees are different so that different purposes and requirements are satisfied.
Instalment loans:The monthly repayment amount is fixed. The loan amount could be 12 times the monthly salary of the applicant with repayment period of 6 to 60 months in general. Instalment loan may be more suitable for big ticket size spend such as renovation, continuing education, wedding or medical expenses, etc. In case you need more cash flow thereafter, some banks even offer a “loan redraw” service. Borrowers can simply redraw the repaid loan any time with no need to apply for a new loan again, thus saving valuable time.
Tax loans: Tax loans are seasonal products that are launched in tax season every year offering a lower interest rate than other loan schemes, but with a shorter repayment period, ranging from 6 to 24 months. Although the main purpose of a tax loan is for paying tax, some banks do not have any limits on the loan purposes and do not require applicants to submit tax returns. Another feature is that some tax loans allow borrowers to withdraw loans in 2 phases according to the tax due, thereby saving lots of interest expenses.
Credit card cash instalment plans:This loan allows borrowers to withdraw cash directly from their credit card account with a fixed monthly repayment amount and repayment period from 12 to 60 months. The cash withdrawal may be less than other loan schemes comparatively, with a cap up to the available credit limit of the applicant’s credit card. If the applicant does not want to open and deal with extra loan accounts, the credit card cash instalment plan could be a suitable choice.
Is simply choosing the longest repayment period a good idea?
An instalment loan may offer repayment period up to 60-month and you might think that to start with the longest period is a good idea as you could simply make early repayment anytime when you have spare money, thus allowing you to save expenses on interest. This may be a lousy idea as most banks will charge an amount equal to a certain percentage of the loan amount or a specific amount as the early repayment penalty. In general, banks use the Rule of 78 to apportion the interest and principal repaid for each monthly repayment. Although repayment amounts in each month are the same, the proportions of interest would be higher and those of the principal repaid would be lower during the early period. In other words, after repaying on time for a certain period, the outstanding interest amount may be relatively little. Borrowers may not save money or even lose more if they choose to make early repayment. This is because the outstanding interest saved may not be enough to cover the penalty. Borrowers are advised to ask the banks about the related expenses for early repayment, including the amount of principal not yet repaid, penalty for early repayment and outstanding interest. Then, they could decide whether to repay early but only after careful comparison and consideration.
In fact, some banks provide a cooling-off period. HSBC’s Personal Instalment Loan offers a cooling-off period of 30 days. In case applicants decide to cancel the loan within 30 days after the loan is approved, all they have to pay is the interest based on the number of day borrowed but no penalty on early repayment. Therefore, applicants’ expenses are greatly reduced.
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