Most Singaporeans need a loan at some point in life. In Singapore, it's fairly easy to get loans to pay for the things we want or to invest in our business.

Personal loans are pretty easy to come by in Singapore. There are plenty of banks and other loan providers offering personal loans designed to suit many different needs.

But it's important to be smart about the way you borrow money. As most of us are aware, money always seems to go much easier than it comes.

Before taking out a loan, there are a few things you should ask yourself:

  • What will I use this money for?

    Will you be investing the money into assets that could pay off in the future (like education, property)? Or do you need more money to spend on your lifestyle (new car, eating out, a big wedding). Taking out a loan to pay for lifestyle upgrades is rarely a good idea.

  • How much interest will I pay?

    Most banks will quote you the regular interest rate, which may be something ranging from 5-12% per year. But to know how much you will pay for a loan, you will need to find out the effective interest rate (EIR). This rate accounts for the compound interest you will pay (interest on interest) during the life of your loan.

  • Can I afford it?

    Once you know exactly how much you will have to pay back, including all interest, you will have a good idea of whether you can afford it or not. Be sure to take possible mitigating circumstances into account. What would happen if you lost your job, or had to take an extended break from running your business due to illness? Avoid taking out loans you cannot easily afford to pay back (home loans are an exception).

  • How long will it take me to pay the money back?

    This will depend on how much extra income you have every month. If you are making an investment, be sure you know how soon the investment will pay for itself. If you are sure the investment will pay quick dividends, you could get a loan with a short tenure and save on interest charges.

Once you have clearly added up how much you can afford to repay monthly, you will have a good idea of how long a loan tenure you will need.

A loan tenure is the amount of time in which you will pay back the loan. In most cases, this will be from as little as 1 year or less for personal loans, up to 7 years or even more.

The shorter the loan tenure you get, the less interest you will pay for the loan. Longer tenures are easier to manage, as you can make lower monthly payments. But the total interest you pay for the loan is normally higher for loans with long tenures.

There may be times when a quick decision is needed, for example when an extraordinary business opportunity comes up (your rival's store is closing down and liquidating stock). But in every case you should take time to ask yourself these questions before deciding to get a loan.

Being smart about the loans you get will make the difference between becoming financially independent, or getting tied up in mountains of debt and compounding interest.