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Home Finance
Taking Out Loans for Large Purchases

4 Guidelines in Taking Out Loans for Large Purchases

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If you want to buy big-ticket items like property, a car, or anything with a huge price tag, you might not have all the money to pay for them in full right away. If you’d like to buy those things right away, you may need to take out a loan from legitimate money lenders.

But large loans can be intimidating. It pays to know when you should take out loans for a large purchase. Here are two guidelines.

Table of Contents

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  • When the purchase is a need
  • When the purchase can become an asset
  • Avoid taking out too many big loans in a short time
  • Be aware of your Total Debt Servicing Ratio (TDSR)
  • Conclusion

When the purchase is a need

Large purchases that are needs can include a home, among others. If you want a more or less permanent place to stay that you can call your own, taking out a property loan is reasonable. Owning your own home can be more financially sustainable than renting for the long term.

When taking out a property loan, though, be aware that you need to have at least 20% of the value of the property to shell out as a downpayment. Banks or lenders may not allow you to borrow the full cost of the property.

Also, you will need to prepare money for legal fees, taxes, as well as maintenance of the property.

When the purchase can become an asset

Taking out an auto loan to buy a car is not always a good idea. But it can benefit you if you intend to use the vehicle as a way to generate income. In this case, taking out a loan for it is wise.

Other examples would be equipment you can use to run a business. Suppose you want to start a photography business. This means you will need a camera, lenses, tripods, extra batteries, memory cards, lights, and many other tools. These can easily rack up a huge amount of money, so you may want to take out a loan to buy all the equipment you need to get the business started.

As your business earns income, you can use part of the income to pay down the loan. Eventually, you will be able to repay the loan in full, and your business will continue to earn money for you.

Now, a good question to ask is how often should you take out these loans? Here are two more guidelines.

Avoid taking out too many big loans in a short time

Loans for big purchases are also big, long-term financial commitments. This means you should have a consistent, reliable source of income so you can repay your loan on time every month until you have paid it back in full. As much as possible, have only one large loan unless you really have the budget to sustain more than one.

Consider your credit score as well. Any time you miss payments or pay late, your credit score can go down. With a lower credit score, applying for future loans will be harder. Lenders may give you less favourable terms as well if they see your credit score going down.

However, if you consistently make your monthly repayments on time and in full, your credit score will go up. This is the best way to maintain a healthy credit score.

With this in mind, limit the number of big loans you take out at any one time. As much as possible, have only one, and pay it off first before taking out another big loan.

Be aware of your Total Debt Servicing Ratio (TDSR)

The TDSR is a safeguard set by the Monetary Authority of Singapore (MAS) to prevent overborrowing. With this rule, only up to 55% of your total monthly income can go into loan repayments. If the loan you intend to take out will require you to assign more than 55% of your monthly income to repayments, you will not be approved for that loan.

Conclusion

Taking out loans for huge purchases can be a good idea if you are wise about your money. If the purchase is either a need or something you can turn into an asset, it’s a good idea to take out a loan for it. You can find a licensed money lender in Chinatown, for one, as well as other reputable lenders all across Singapore.

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