What Is Debt? Exploring Financial Borrowing In Singapore
August 21, 2023
We incur debts at least once in our lifetime. The most popular method of borrowing money for business, government, or personal use is through debt. For example, a person, a firm, an employee, or a student may need money to purchase products and services, capital improvements, real estate, or educational expenses.
So what is debt and the borrowing methods available in Singapore? Read on to get a firm understanding of it in a financial context and how debt operates. We shall also look at the advantages and disadvantages of debt, strategies to pay off debt in Singapore, and the types of corporate debt in Singapore.
What Is Debt?
Debt is a borrowed sum of money that a person, business, or other entity uses to finance large, typically unaffordable expenditures or investments. It must be repaid with interest over a specified period of time.
Among the most common debt types are:
- Personal Loans,
- Credit Card Debt.
We shall look at more examples of loans later in the article.
Here are five key takeaways on what is debt:
- Debt is when one party owes money to another (the lender). There is an understanding that they will pay back the money with interest within the predetermined time frame and per the conditions of the contract.
- A person or business may frequently ask for money to pay bills, finance business ventures, or care for an unmet need.
- The primary categories are secured debt, revolving, unsecured debt, stealth, and corporate debt. Examples include mortgages, credit card loans, notes, bonds, and business, personal, commercial, or education loans.
- A borrower must consider its benefits and drawbacks to pay off debt financing swiftly. Collateral is a requirement for a secured loan, and if the applicant defaults, the lender may seize the collateral.
- Issuing Bonds is another type of debt that corporations can issue to raise money.
How Debt Operates In Singapore
Knowing how debt operates is crucial before borrowing. This will help you weigh its pros and cons and help you plan how to repay the debt.
Common Forms In Singapore
The most well-known forms of loans include:
- Car loans. These are loans people take to purchase a vehicle.
- Mortgages. They are loans that people borrow from financial institutions to buy real estate and homes. The collateral here is the property itself.
- Personal loan. It is the cash you borrow from a financial organization with regular monthly payments over a predetermined length of time.
- Credit card debt. They are an unsecured liability incurred due to revolving credit card loans. By opening many credit card accounts with various terms and credit limitations, borrowers may build up credit card debt.
The loan terms stipulate two crucial things which are:
- Repayment period. Most loans require complete repayment by a specified date, which could be months or years. The borrower is typically given a specific amount of money as part of the agreement.
- Interest. The loan terms will also specify how much interest the borrower must pay, representing a percentage of the loan sum. The lender receives interest as payment for the loan’s inherent risk.
Revolving Or Open-end Credit
Operating principles for credit cards and lines of credit vary slightly. They offer open-ended or revolving credit with no set expiration date. The borrower is given a credit limit, provided they don’t go over it; they can use their credit card or credit lines regularly.
An Example Of Debt In Singapore
A good example of debt in Singapore is the education loans eligible for university students.
Students who take out federal student loans to cover the cost of their education get a specific amount of money, which they promise to repay after graduation with interest.
There are now numerous repayment plans available to students. In the standard repayment plan, students have to pay regular monthly payments for ten years under this plan. After which their debt will be entirely repaid.
The monthly payments will cover a percentage of their debt’s principal and interest. Undergraduate federal student loan interest rates in Singapore are presently 4.99%.
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Types Of Consumer Debt In Singapore
Numerous types of debt financing exist. Borrowers should be aware of these to improve their debt relief and debt control:
A secured debt requires the borrower to put up collateral for the financial institutions to give them loans. This led to the adoption of the name collateralized debt.
Secured debt must be repaid within a specific period. Defaulting the repayment plans will result in negative consequences such as seizing and selling the collateral.
Before a secured loan is granted, the financial institution conducts a background check on the ability of the borrower to repay the loan and their creditworthiness. Examples of secured loans include mortgage, car, and credit card loans.
In unsecured debt, there is no collateral. The lender (financial institution) looks at the borrower’s credit history, credit score, and other factors, then decides whether to lend the money.
Unsecured debt usually attracts high-interest rates. If the borrower defaults, the lender can file a lawsuit. Such loans include medical, credit card bills, student, and other personal loans.
With revolving debt, the borrower can borrow as many times as they wish, provided they regularly make small payments to the creditor. Revolving debt is convenient to the borrower as they can make payments and borrow any amount per their needs. Examples of such debt include store cards and credit cards.
A mortgage is a secured debt people borrow from financial institutions to purchase a home or real estate property. The repayment period of mortgages is 15 to 30 years.
Mortgages frequently constitute the most substantial financial obligation. It is second only to student loans that individuals will undertake, encompassing many options. Mortgages are classified into two, i.e.:
- Fixed-rate mortgages
- Adjustable-rate mortgages (ARMs).
In the context of adjustable-rate mortgages, the interest rate has the potential to fluctuate at regular intervals, typically contingent upon the performance of a specific index.
Housing Development Board (HDB) Loans And Private Bank Mortgages
This is one of the consumer debt borrowing methods. A loan obtained by the Housing and Development Board, or HDB for short, is used to purchase a home.
Currently, the interest rate for HDB loans is 2.60%. The interest rates of HDB loans have demonstrated remarkable stability for a period exceeding ten years.
Types Of Corporate Debt In Singapore
Companies in Singapore have access to loans specifically tailored just for them. They include:
They operate just like individual loans. The repayment period may vary from lender to lender, together with the interest rates.
Bonds are a type of financial instrument that enable corporations to borrow money from bondholders in exchange for the promise to repay the principal plus interest. A person or a financial institution can purchase the interest rate, or ‘coupon,’ on a bond.
For instance, if a corporation wants to finance $1,000,000 to acquire new machinery, it might issue 1,000 bonds of $1,000 each.
Most bonds have a maturity date when the investor must redeem them in exchange for the bond’s full face value. The investor will also accumulate interest from consistent payments made over those years.
Companies can issue commercial paper if they need short-term financing for 270 days or less.
Advantages And Disadvantages Of Debt In Singapore
Debts come with advantages and downsides, which include:
Benefits Of Debt
If you utilize debt properly, you could benefit in the following manner:
- Helps bridge the gap when initial capital is insufficient to launch a business.
- Aids in the growth of a company.
- Debt financing is a legitimate and practical option.
- Reduces a person’s tax burden.
- Facilitates significant purchases.
- Allows one to access previously inaccessible options, such as higher education loans, international expansion, etc.
Drawbacks Of Debt
Debt is known to have several disadvantages, which include:
- The possibility of becoming bankrupt heightens in debt.
- In the case of secured debts, one may be required to risk personal assets and collateral.
- Interest accrued on debts is a constant cost and can add to a substantial sum for many people.
- It can cause delay in taking on more debt until existing obligations are settled.
Too much debt can devastate a business, forcing it to divert much of its profits from more profitable uses to debt service. This, in turn, negatively affects the economy of Singapore.
Strategies To Pay Off Debt In Singapore
A strategy for paying off your debt is the greatest approach to avoiding financial disaster. To do that, one must first avoid taking on excessive debt.
Credit Utilisation Ratio
The debt-to-limit ratio, commonly called the credit utilisation ratio, is one indicator that customers should be aware of. It represents their current debt as a proportion of the total credit they can access.
A person’s credit utilization ratio is 50%. For instance, if they have two credit cards with a combined $10,000 credit limit and $5,000 in outstanding balances.
Credit ratings punish people for exceeding that limit. Lenders normally prefer that customers keep their credit usage percentages below 30%.
The quickest way to pay off debt is to set aside a larger portion of your monthly income for debt repayments. You are ideally, paying off credit card balances in full each month to avoid incurring interest fees.
Debt Consolidation And Balance Transfers In Singapore
You can practice debt consolidation and combine many loans into one. This option may be advantageous if the new loan has a cheaper interest rate. Similarly, you can move your credit card debt to a new card with a lower interest rate or, ideally, a temporary 0% interest rate.
Examples And Definitions In Singapore
You will likely encounter the following terms in Singapore financial sector.
What Are The Different Types Of Debt?
Debt is where one party owes another money. The types of debt available in Singapore include mortgages, secured, unsecured, and revolving debt.
Legal Definition Of Debt
According to the debt collection Bill of Singapore, the term debt refers to a financial obligation owed by an individual or entity known as the debtor.
Differences Between Debt And Loan In Singapore
To be in debt is to owe money or property to another party. Various assets, including real estate, cash, services, and other goods and services, can secure debt.
A loan is an obligation to repay money borrowed from one party by another. The lending institution determines loan amounts, due dates, and interest rates.
Differences Between Debt And Credit In Singapore
In contrast to debt, which represents a financial obligation, credit indicates the availability of funds for borrowing purposes. For instance, unless your credit cards are at their limit, your debt will always be smaller than your available credit.
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The Bottom Line Of What Is Debt In Singapore
Debt is a vital component of the modern Singapore economy. Companies in Singapore incur debt to finance critical projects, while individuals may use it to make significant purchases or pay for educational expenses. However, carrying too much debt presents risks for businesses and individuals.