Be a Loan Boss
One thing they don’t teach you in school? How to pay for it. Here’s a cheat sheet on how to conquer one of the trickiest parts of adulting: paying off your debt.
We all know degrees are expensive, but did you know that Singaporeans pay one of the highest university tuition fees in the world? In fact, a study by the Economist Inteligence Unit in 2015 revealed that a four-year degree costs more than half of a person’s yearly income. But if you need that degree, you need that degree, and that’s where student loans can come in.
Learning how to manage your debt is a vital skill, so here’s a guide on how to be a loan boss and keep those invisible payments under control. We’re going to focus on education loans here, but the principles are the same for other kinds loans.
You probably know this if you’ve already finished university, but several banks offer loans. However, no two loans (student or otherwise) are created equal. “Before committing to any loan, perform research across lenders in the industry,” says Citibank’s Head of Portfolio Lending, Cards and Personal Loans, Pratik Bhattacharjee.
First, check to see if the interest rate is flat or monthly. A flat interest rate is calculated from the size of the initial loan and is the same every month. A monthly rate is calculated from whatever the remaining amount is that month. Generally, a monthly rate will cost less over time because as you pay off your debt, the interest added onto each payment is reduced.
Also, check for additional fees. To make a profit on a low interest rate, banks may apply a steep processing fee for the loan. Another thing to take note of is a disbursement fee, which is a percentage taken by the bank when a loan is first given out.
Setting a timeline
The next thing you should consider is the loan tenure, which basically means how long you have to repay your loan and when repayment begins. Longer loan periods typically have higher interest rates, so go for the shortest time frame you can afford to make regular payments on.
Different banks have different payment timelines. OCBC, for example, has three student loan options: Standard, Graduated, and Graduated Plus. With Standard, you begin repaying
immediately after the loan is given out at an interest rate of 5.54 percent over five years. For Graduated, you pay only the interest until the end of your course; monthly instalments will only start after you graduate. For Graduated Plus, you pay interest on the loan for up to one year after the end of your course, and then pay monthly instalments from the second year onwards. While Graduated interest rates are lower, keep in mind that you’re paying interest over a longer period, so it’s not necessarily saving you money.
It’s payback time
Now that you’re ready to start paying off your loans, only one thing really matters: making your monthly payments on time. Late fees are no joke and unfortunately, there are no shortcuts here. Late fees for education loans start at $30 per payment.
In general, paying back a loan fast saves you money in the long run. But watch out for repayment fees, which are incurred by trying to pay off a loan too quickly. Banks want to profit off interest, and if you pay a loan off faster than what was agreed, they lose that profit. Repayment fees discourage this, but if it ends up being less than interest over time, it’s definitely the way to go. A repayment fee for an education loan is generally one percent of the unpaid amount.
The struggle is real
Paying off loans can really do your head in, so don’t be afraid to get an expert opinion. “Seek professional advice from your bank, financial planner or organisations such as Credit Counselling Singapore,” says Pratik. Additionally, as OCBC’s Head of Cards, Vincent Tan notes, “A considerable number of people are facing financial difficulties because of family or medical circumstances.” To prevent this, he advises “planning ahead or having an insurance coverage plan,” which can really relieve the pressure.
What you should do next if you have multiple loans, is find a bank with a solid Debt Consolidation Plan. These plans “[help] consumers better manage their finances by combining all outstanding balances from all their credit cards and personal loans across multiple financial institutions into one fixed monthly repayment,” says Vincent. The perks of this are the interest rate and simplicity: instead of paying various interest rates on debts across a spectrum of banks, you pay one interest on one debt—much easier to keep track of, too.
All paid off
Well, you did it: your loan’s been paid off, and that’s something to be proud of. If you take out a loan again – be it personal or for your first home – you’ll know how to manage them like a (loan) boss. Congrats!
A study by the Economist Inteligence Unit revealed that a four-year degree costs more than half of a person’s yearly income.