For Self-Employed Singaporeans, Personal Loans are Tougher to Get
In Singapore, personal loans charge higher interest than other secured loans such as Mortgages and credit card loans. They’re also not backed up by collaterals which means that the lender cannot directly seize your home, car or any asset owned by you if you fail to pay back the amount you borrowed. For this reason, personal loans are also called “unsecured loans”. However unsecured does not mean its free lunch because you have a higher interest rate to pay, and there being no consequences means the lender can take any action including a lawsuit to force you to pay.
If you default your loan, your credit score still gets damaged which collectively affect your ability to get credit cards or loans in future. Statistics made on 7 November 2017 by CNBC showed that household expenses are the most reasons for applying for personal loans. Self-employed Singaporeans, however, may face challenges accessing personal loans for various reasons. Here are some of the tips to help you get a personal loan if you’re self-employed.
Your CPF statements may not assist you.
It’s a challenge to apply for personal loans because your income is unstable and, in most cases, not well-documented. While employed individuals only need to submit their CPF statements to process their loans, self-employed people may need to jump through a number of hoops to provide proof of their earnings.
There is a popular misconception that banks check your salary based on your CPF contributions. Banks only check the claims of other regular employees by looking at their CPF statements and can view when extra voluntary contributions are made. If you’re self-employed and in need of a personal loan, you don’t have to submit your CPF documents and even if you have made voluntary CPF contributions, they may not help.
Instead, you will be asked to produce your income tax Notice of Assessment for two years (although it may vary based on the financial institution). If you earn your income by working on a commission basis, you will also be asked to provide a statement on your commissions for the past six months.
Your inconsistent income may be counted as low
Many loans tend to have a 30 per cent cut when banks are factoring the income. For instance, if your income is $8,000 a month, the bank may count it as $5,600. This is a major hook for many car loans and mortgages where the loan quantum can be drastically lowered hence affecting your overall loan expectation. In manyoccurrences, the banks may reduce the credit ceiling or even make it hard for self-employed persons to qualify.
However, some banks may process loans based on your credit card scores which may have nothing to do with income. That means you can be trusted to repay your loan in time without causing unnecessary drama. Excellent credit score may also affect your average personal loan interest rate according to Value Penguin. Therefore, all is not lost, just keep your credit score healthy, and it will save you.
Finding full-time or part-time employment for a month won’t help either
Note that for you to be validly considered an employee, and for the bank to request your CPF statements as evidence of your income, you must be employed for three months or more. That means that you cannot switch from self-employment to full-time or part-time employed job for a month and expect to get a loan— let’s just assume the banks must have already figured that out.
Get yourself a line of credit while employed
If you have not been self-employed for more than two years, you should probably know that you cannot get a loan because you will need to present your Notice of Assessment which is generally for two years. As such, its critical for new startup owners or self-employed individuals to secure a line of credit before quitting their job. The credit card or line of credit is usually valid for two years.
It can cover you for the duration needed before your Notice of Assessment qualifies you for any personal loan. You should also note that there are many advantages that come with having a valid line of credit or credit card for newly self-employed people. One of the significant benefits is that they have a lower interest which also slightly differ based on the financial institution. Credit lines also do not charge a withdrawal fee when you use it to get cash.
Your credit score matters the most
Always get loans that you’re capable of paying in full and on time. Qualifying for a personal loan for a self-employed individual is more difficult than for employed persons especially if your credit score is low. Failing to pay or defaulting on your loan can reduce your access to bank loans or quickly turn from difficult to impossible. It’s also important to understand that unlike many other countries, Singapore seldom varies the interest rate based on credit grade.
In Singapore, your credit grade is determined using a computer program that tracks your credit usage through a proprietary algorithm. The highest credit grade is the AA, B and C indicate delinquency or late repayments while grade D—the lowest, is often caused by defaults. You can check your credit score from the Credit Bureau of Singapore at $6 fee. So how do you improve your credit score in Singapore? Here are a number of ways:
- Take and pay a loan to repair a damaged credit: You can slowly start building on your ruined credit by continually borrowing small amounts and repaying them in full.
- Never default on your loans: A single default can automatically make it impossible ever to get a loan.
- Always repay loans on time: Don’t wait for letters to remind you of your debt. By the time you receive the second or third letter, your credit score will have already dropped significantly.
- Avoid multiple loan enquires at the same time: If you keep applying for three or four loans in a short period of time, the financial institution may regard you as financially unstable.
- Don’t leave too many credit facilities open: This is because you are more likely to get confused by the various miss payments and billing cycles.
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