Life in Singapore is exciting but can also be very expensive. The cost of living is higher than most countries in Southeast Asia and other parts of the world. Living in the Lion City entails higher living expenses, which can be challenging for many of its residents.
Many Singaporeans rely on borrowing money to help make ends meet and finance their life goals. The only thing is the lending landscape can be quite tricky to navigate, even for experienced borrowers. Oversights are still likely to occur, which can lead to critical consequences.
Here are some crucial mistakes savvy borrowers make:
Overconfidence in Future Income
Generally, it is advised for borrowers to weigh their options carefully, taking into consideration their income potential. This allows them to assess if they can afford to make the monthly repayments without compromising other aspects of their lives.
However, in certain cases, borrowers fail to anticipate changes in their current income source. Basing affordability on one’s current income source can be quite risky because of factors beyond the borrower’s control. It can be an unexpected career turn or a fluctuating economy. Whatever it is, failing to have a plan B can have dire consequences in the long run.
Not Factoring in CPF Usage
The Central Provident Fund (CPF) is vital in mortgages and other needs. However, overuse or misuse of the CPF fund can negatively impact your retirement security. Accessing CPF funds now for a down payment on a house might leave you with far less than what you prefer come retirement age.
Wise borrowers will think long and hard before using their CPF funds. They will consider its long-term implications and how it will affect their retirement funds. Look into alternative options like using a smaller portion of your CPF contributions. You may also seek out a loan that requires minimal CPF usage so your retirement security doesn’t get compromised. Ask a representative from a traditional bank or a legalised money lender in Singapore for what they can offer.
Misunderstanding Lock-in Periods
Another common oversight even long-time borrowers can commit is misunderstanding loan terms. Fixed-rate loans—loans with guaranteed interest rates—have a specified repayment period. In most cases, these are lock-in periods, which means penalties for early repayments.
Understandably, some folks would want to finish their payments at the soonest possible time, but this approach may not be an advantage for fixed-rate loans. approach may not be an advantage. While they do come with lower interest rates, those early repayments will negate the benefit.
A good alternative would be variable-rate loans.
Co-signing Lightly
When a person co-signs for someone, it means they take financial responsibility for when the principal borrower defaults on a loan. Some experienced borrowers co-sign for others—family and friends mostly—but fail to consider potential consequences. It can put a strain on healthy relationships, so if your friends and family matter to you, give it plenty of thought before committing. Ensure the primary borrower has a good credit history and a sound repayment plan if you intend to co-sign for them.
Impulse Borrowing
Even experienced borrowers aren’t immune to impulsive decisions. Major purchases like a car or the latest mobile device can make borrowers turn to loans to satisfy their appetites. Delayed gratification isn’t always a reality. One downside to taking out a loan for instant gratification is you might end up in a debt trap.
Borrowing money involves thoughtful planning. Before committing to a loan, create a realistic budget factoring in potential loan repayments to see if you can afford it. It is recommended you consider other alternatives first such as saving up or looking for another income source. Responsible borrowing means making wise financial decisions.
Wrapping It Up
Taking out a loan, regardless of loan type, is a huge financial decision that involves careful planning. If experienced borrowers can make critical oversights, you must put up safeguards to ensure you don’t end up with unnecessary financial burdens. If you must borrow, you have to perform due diligence so you can make informed decisions.
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