For most Singaporeans, major expenses are inevitable. Whether it is a home renovation, medical treatment, higher education, or even a wedding, these significant life events often require a substantial amount of money. When faced with such financial decisions, the age-old question arises should you use your savings or take a personal loan Singapore option?
The decision may seem simple at first glance, but it is more complex than it appears. Dipping into savings can provide immediate relief without debt, but it also reduces your financial safety net. On the other hand, taking a personal loan can help you preserve liquidity and maintain your savings buffer, although it comes with interest costs and repayment responsibilities.
In this article, we will explore both sides of the equation, help you weigh the pros and cons, and guide you through when a personal loan Singapore might actually be the smarter financial move.
Understanding Your Financial Situation
Before deciding between using your savings or applying for a loan, it is important to assess your overall financial standing. Consider your income stability, existing commitments, and the size of your emergency fund.
In Singapore, financial experts often recommend keeping at least three to six months’ worth of living expenses in an emergency fund. This ensures that you have enough to manage unexpected situations like job loss or sudden medical needs. If paying for a large expense would significantly deplete that fund, it may be more prudent to take a loan instead.
By keeping your emergency savings intact, you preserve your financial flexibility and protect yourself from future uncertainties. This approach is especially useful for working adults with dependents or ongoing financial obligations such as mortgage payments or education fees.
The Case for Using Savings
For some, paying in full with savings feels like the responsible thing to do and often, it is. The main advantage of using savings is that you avoid paying interest. This means the total cost of your purchase or expense remains exactly what it is, without the added burden of repayments.
There is also peace of mind in being debt-free. Some people prefer not to owe money, even temporarily, as it allows them to feel more in control of their finances.
However, the main drawback of this approach is that your savings may take years to rebuild. For example, if you use SGD 30 000 of your savings to fund a wedding or a renovation, you are reducing your liquidity. Should an emergency arise, you may have to resort to borrowing at a higher rate later.
Another consideration is opportunity cost. The money you use from savings could otherwise be invested or placed in a high-yield savings account, generating returns. If the interest you would earn is higher than the cost of borrowing, taking a loan could actually make more financial sense.
The Case for Taking a Personal Loan
A personal loan Singapore is designed to help individuals manage larger expenses without draining their cash reserves. These loans are typically unsecured, meaning you do not need to pledge any collateral. Most banks and a money lender Singapore offer personal loans with flexible repayment terms that can range from one to seven years.
Here are some situations when taking a personal loan can be a smarter choice:
1. You Want to Preserve Your Emergency Fund
It is risky to spend your entire savings on one major purchase. A personal loan allows you to pay for the expense upfront while keeping your emergency fund untouched.
2. You Are Facing a Time-Sensitive Expense
Some situations, such as urgent medical treatments or car repairs, require immediate cash. A money lender Singapore can provide an instant cash loan with fast approval, helping you manage time-sensitive needs without long delays.
3. You Can Repay Comfortably Over Time
If you have a stable income and can manage monthly repayments, a personal loan spreads the cost over several months or years. This makes it easier to budget without putting pressure on your current finances.
4. Interest Rates Are Manageable
While loans do come with interest, rates in Singapore for personal loans can be quite competitive, especially if you have a good credit score. Some financial institutions offer promotional rates that make borrowing relatively affordable compared to depleting your savings.
Comparing Banks and Licensed Money Lenders
In Singapore, you can obtain personal loans from either banks or a licensed money lender Singapore. Both have their own benefits and requirements.
Bank Loans often offer lower interest rates for borrowers with strong credit histories. However, the approval process can be more stringent, and it may take longer for funds to be disbursed.
A licensed money lender Singapore, on the other hand, provides faster approval and is often more flexible with eligibility criteria. For instance, individuals with lower credit scores or those who need an instant cash loan can benefit from the speed and convenience that licensed lenders provide.
When choosing between the two, always ensure that the money lender is legally registered under the Ministry of Law’s list of approved lenders. Avoid unlicensed or illegal lenders, as they may charge exorbitant interest rates and use unethical collection practices.
Interest Rates and Opportunity Costs
One of the most important factors when deciding between savings and a loan is the interest rate. If the loan interest rate is higher than what your savings can earn, it may be better to use your savings. However, if your savings are invested in something with higher returns—such as CPF investments or a diversified portfolio you may be better off taking a loan and keeping your money working for you.
Let us take an example. Suppose you have SGD 20 000 in savings earning 3.5% per year. You need SGD 10 000 for a medical procedure. A bank offers you a personal loan with an interest rate of 4.2% per year. In this case, the cost of borrowing is relatively close to what you could earn from your savings. By taking the loan instead, you preserve your savings and continue earning returns, while paying off the loan gradually.
This kind of strategic decision-making allows you to manage liquidity more effectively while balancing both short-term and long-term financial goals.
Protecting Your Savings
Using savings may seem convenient, but it can leave you vulnerable in the long run. Having cash on hand allows you to respond to unexpected situations, take advantage of investment opportunities, or manage temporary income loss.
Imagine using your savings for a large purchase, only to face retrenchment a few months later. Rebuilding your safety net becomes difficult, and you may find yourself in a more stressful position.
A personal loan Singapore helps avoid this scenario by maintaining your savings cushion. As long as you can comfortably manage the repayments, this option offers peace of mind and stability.
When Savings Make More Sense
While loans have their benefits, there are times when using savings is the better option. If you are making smaller purchases that will not significantly impact your emergency fund, paying in full may be more cost-effective.
For example, if you need SGD 3 000 for a minor renovation or a new laptop, the interest you would pay on a loan may outweigh the benefits of keeping your savings intact.
Additionally, if you have existing debts, adding a new loan could stretch your budget thin. In such cases, it is better to focus on clearing existing obligations before taking on new ones.
How to Decide: A Simple Framework
To make a sound decision, ask yourself the following questions:
- Will using my savings leave me without an emergency fund?
If yes, consider taking a loan to protect your financial safety net. - Can I afford the monthly loan repayments comfortably?
Calculate your income-to-debt ratio. Ideally, your total debt payments should not exceed 40% of your monthly income. - What is the cost of borrowing compared to my potential investment returns?
If your savings earn more than the loan’s interest rate, keeping your savings invested may be the smarter choice. For further reading on how to grow your money through mindful investing refer to this guide on wealth planning and mindful investing. - Is this expense necessary and time‐sensitive?
Urgent expenses often justify taking a loan, while discretionary ones might be better postponed or paid for with savings. For example, if you are exploring passive income streams you might look at tips here best ways to earn passive income in Singapore.
Smart Borrowing Tips
If you decide to take a personal loan Singapore, follow these best practices:
- Compare interest rates from multiple lenders before committing.
- Check eligibility and ensure the lender is licensed under the Ministry of Law.
- Read the fine print for processing fees, late payment charges, and early repayment penalties.
- Avoid over‐borrowing. Only take what you truly need.
- Repay on time to maintain a good credit score and avoid additional costs.
By being diligent and disciplined, you can use personal loans as effective financial tools rather than burdens.
If you want ideas on optimising other financial tools like credit cards consider reading this post on credit cards for young adults in Singapore.
A Balanced Approach to Financial Decisions
At the end of the day, deciding between using savings or taking a loan is about finding balance. It is not always one or the other. Many Singaporeans use a mix of both paying part of the expense with savings and financing the rest with a manageable loan.
This balanced approach helps reduce the burden of repayment while still preserving a healthy level of savings. It also reflects a more flexible mindset, one that prioritises both financial stability and long-term growth.
Final Thoughts
There is no one‐size‐fits‐all answer when it comes to choosing between a personal loan Singapore and using your savings. The right choice depends on your individual circumstances, goals and comfort level with debt.
If maintaining your savings for emergencies and future investments is a priority, a well-structured loan from a reputable money lender Singapore could be the smarter move. However, if the expense is modest and your savings remain sufficient afterwards, paying outright can save you money in interest and fees.
The key is to think strategically, plan ahead, and make informed choices based on your long-term financial wellbeing. With the right approach, both options can serve as valuable tools in managing life’s major expenses without compromising your financial stability.
