Should You Take A Personal Loan To Help With The Rising Costs Of Living?

“Things are cheaper than before!” said no one ever. When it comes to living costs, there’s a lot that Singaporeans are up against. Singapore was ranked as the world’s most expensive city in 2023 on top of our Guinness World Record for being the most expensive city in the world to buy a car. Inflation continues to affect our purchasing power and even our mental health. And as of 2024, we’re now also grappling with the 9% GST hike. What do we do when our living costs go up and our salaries don’t? There is one possible solution: A personal loan. 

A personal loan is money borrowed from a bank or lender, to be repaid over time with interest. Unlike specific loans like car loans or home loans, it’s generally not tied to a particular purchase or purpose. It’s just a bunch of money that’s loaned to you for you to spend however you want. This makes it perfect for financial relief when you’re planning to make a large expense or want to consolidate your credit card debts.

But is a personal loan appropriate to help you with rising costs of living? Let’s take a look at the pros and cons of using a personal loan to fund everyday expenses to decide.

 

Should you take a personal loan to help with the rising costs of living?

1. What is a personal loan and how does it work?
2. Pros of taking a personal loan to cope with rising costs of living
3. Cons of taking a personal loan to cope with rising costs of living
4. So, is a personal loan to help with the rising costs of living a good idea?

 

1. What is a personal loan and how does it work?

When you apply for a personal loan from a bank, the bank will review things such as your credit history, the amount you want to borrow, and the length of time over which you want to repay the money (i.e. the loan tenure).

After going through these items, they’ll give you your loan interest rate. This rate determines how much extra cash you need to return to the bank on top of the borrowed amount. For example, let’s say you borrowed $10,000 and your interest rate is 5%. You’ll eventually need to return $10,000 plus an extra $500, which is 5% of $10,000.

Of course, we’re simplifying things here. If you’re seriously considering a personal loan, I highly recommend you read more about personal loans and learn the difference between applied interest rates and effective interest rates (EIR). Feel free to come back to these links later; for now, let’s continue investigating if personal loans are a sound solution to increased costs of living.

 

2. Pros of taking a personal loan to cope with rising costs of living 

Affording large, one-off expenses

 

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With everyday costs going up and up, the chances of you saving enough money for that vacation to Europe or for your big dream wedding grow ever slimmer. These are large expenses that you may want to consider taking a personal loan for because—let’s face it—you can’t put a price on experiences like these.

If you’re already having a hard time trying to save up enough money for your wedding or next vacay, it may be helpful for you to use a personal loan for these expenses. Given your current everyday spending and saving habits, ask yourself how much spare cash you can afford to put towards servicing a loan each month. When you’re applying for a personal loan, make sure to choose a loan amount and tenure that results in a monthly repayment you can afford.

For example, let’s say you earn $2,500 a month and want $10,000 for a grand destination wedding. That’s money you don’t immediately have on hand. With a UOB Personal Loan, you can borrow $10,000 in one shot for your big day and repay it over 3 years with a monthly repayment of $302. A personal loan splits up your huge expenses into more manageable monthly payments.

 

Immediate financial relief and stress reduction

Once approved and processed, a personal loan is paid out to you in one lump sum fairly quickly, often within a few days. Imagine waking up tomorrow and finding your bank account was magically topped up overnight! You’re immediately relieved of any urgent financial obligations you have. For example, perhaps you might have incurred an urgent unexpected expense last year when your pet had to undergo surgery. At the same time, perhaps you’ve also accumulated some credit card debts that you’re now struggling to pay off. With the money you receive from a personal loan, you can pay these all off in one shot and immediately relieve yourself of these financial pressures. Congratulations!

That elation and relief you’d feel would contribute directly to a better state of mind and offer you a sense of control over your financial situation. After all, the stress of financial uncertainty can be overwhelming, and its effects on mental health are not to be understated. With a clearer head, you’ll also be in a better place to execute the next point.

 

Time to devise a long-term financial strategy

A personal loan doesn’t just buy you peace of mind—it also buys you valuable time and energy. Now that you aren’t worrying about which debt to pay off first or when your next rental payment is due, you have more bandwidth to focus on planning for the future. This is your chance to come up with a budget and financial plan that lets you lead a comfortable lifestyle within your means while still preparing for emergency expenses. Pro tip: If you don’t already have one, setting aside an emergency fund should be on top of your list!

 

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Any sound financial plan starts with looking at your income and setting quantifiable financial goals. From there, we recommend the 50-30-20 budget rule—50% of your take-home pay on necessities, 30% on fun stuff, and 20% on savings and investments. 

 

3. Cons of taking a personal loan to cope with rising costs of living 

Long-term financial implications and obligations

I was painting very happy pictures in the section above—scenarios where you receive a wad of cash, pay off your debts, and walk into a brighter financial future. But there are also many harsh realities to personal loans. First and foremost, the moment you take any loan, you will be paying back more than what you borrowed. From a monetary perspective, that means you’re paying a greater cost. That cost can be significantly higher with longer loan terms, higher interest rates, or high processing fees.

Additionally, don’t forget that you’re indebted to the bank and need to make monthly repayments consistently for the full repayment term. Do not miss a payment! Your interest will continue to roll on the higher outstanding amount and you’ll be slapped with unnecessary late payment fees—usually around $100 for personal loans like the UOB Personal Loan and the Standard Chartered CashOne. If you miss 2 payments within 6 months, Standard Chartered will also impose an additional default interest of 4% p.a. on your EIR, bringing it to over 10% p.a.. Now that’s going to sting.

At the same time, repaying your personal loan early may not be advantageous to you. Personal loans often come with prepayment penalties or early redemption fees, which kick in when you want to pay off the outstanding loan amount in one shot. Using the example above, the Standard Chartered CashOne personal loan will slap you with a penalty of $150 or 3% of your outstanding loan amount, whichever is higher. If you still have a large sum of money outstanding, 3% can amount to a higher cost than if you were to just fulfil each monthly repayment as it comes.

 

Impact on credit score and future borrowing ability

If you fail to make timely payments, it’s not just your total loan costs that are negatively affected. Late payments will also be detrimental to your credit score, affecting your ability to take another personal loan in the future.

Your credit score is an overarching marker of your credit health and also comes into play when you’re signing up for a new credit card or applying for any type of loan. That includes a home loan for your new BTO flat, and an education loan for you to further your studies and finally earn that “Dr.” in front of your name. 

 

Potential for misuse 

It’s easy to get caught up in the excitement of all the things you could use a personal loan for. Given a stash of cash, who doesn’t have things they would love to spend on? You might be tempted to use your personal loan for non-essential or impulsive purchases, rather than the critical financial need or well-thought-out, meaningful expenses for which it was intended.

Cash that’s splashed on unnecessary impulse buys can’t be easily earned back, so I would advise you to have a very clear idea of your motivations for taking a personal loan beforehand. From that point onwards, don’t label it as your “personal” loan in your head. Call it your “family vacation” loan, or your “emergency vet bill” loan.

 

4. So, is a personal loan to help with the rising costs of living a good idea?

Personal loans give you a lump sum of cash that can help you pay for one-off large expenses give you the financial relief you may need to get a hold of your long-term financial strategies. However, its pitfalls include incurring further costs due to late payments, damaging your credit score, and misusing the money.

A personal loan is only as useful as its borrower makes it out to be. It can certainly be a helpful tool to combat the ever-rising costs we face every day—if used with the right motivations and repaid consistently each month. If you’re confident that can be you, check out our personal loans comparison page to discover the best personal loan for you. Still not sure if a personal loan is right for your current financial situation? Find out with these 7 questions.

If you aren’t keen on taking a personal loan, there are other ways to cope with rising expenses. Aside from better budgeting, you should also make full use of government-backed assistance schemes such as the CDC Vouchers 2024 and the GST Vouchers 2024. Check out your options for more government financial support schemes, which include subsidies for students, caregivers, seniors and more.

 

Amidst our rising costs of living, did you find this article useful? Share it with your family and friends!

 

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About the author

Vanessa Nah is a personal finance content writer who pens articles on the ins and outs of personal loans, the T&Cs of credit cards, and the ups and downs of alternative investments. She’s a researcher at heart and leaves no stone unturned when it comes to breaking down complex finance concepts and making them easy to understand for the everyday Singaporean. When Vanessa’s not debunking finance myths, you’ll find her attending dance classes, fingerpicking a guitar, or (most impawtently) fulfilling her life mission to make her one-eyed cat the most spoiled and loved kitty in the world.

 

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