So you need money but you're not sure which option is best for you? If you find yourself short at the end of the month, there are ways to get cash that will make sure you're not hurting yourself in the long run.
Whether it's because you're facing higher monthly expenses or you're tackling pricier projects, you might have a need for personal financing. But just as it's important to make the right spending choices, you need to make the right financing decisions.
It might be tempting to make ends meet with an easy cash advance from your credit card, but you'll face instant management fees at a high rate, possibly along with other service fees. Likewise for paying the minimum on your credit card bill. It's better than skipping the payment altogether, but doing it regularly means you are only prolonging your debt and unnecessarily paying more fees.
Choosing the right type of financing can save you a lot of money as you work towards your dreams. So here's a quick guide to help you understand your different options, so you can make an informed decision based on your personal finance needs.
Let's look at the basics:
Using a credit card is a great option for a convenient, short-term (and manageable) financing for everyday purchases. Credit cards are more secure than cash, they can be used on the spot and they often come with attractive spending rewards. Basic spending with credit cards is a great way to build your credit, but only if you pay your entire bill as soon as it is due.
If you need to use your credit card for bigger purchases, look into your available options. Even if you have no collateral, having a credit card automatically gives you some spending power and a few ways to access money.
Credit card related financing:
Cash advance: using your credit card to withdraw money at the ATM. This should be done only in case of emergency. Cash advance fees are fixed and are very high and they are charged instantly – there is no fee-free period..
Cash installment plan: a better option than cash advance. You need to apply in advance, but it allows you to convert your credit limit into cash at a much lower management fee than a standard cash advance.
Balance conversion plan: divides your purchase into equal monthly payments spread out over a set length of time. It's always better if you can pay your credit card bill in full. However, this is a good option you're buying big-ticket items, like new furniture or appliances, and you know you won't be able to comfortably pay your entire bill.
Pros for credit cards: No waiting for basic use, multiple types of card available, rewards, and 0% management fee if you pay your bill in full.
Cons: Higher management fees and there are penalty charges for late payments. You also have a lower credit limit (the total amount your card issuer allows you to use at one time).
Tip: Review your spending habits and lower your credit limit if you're having trouble paying it back.
Personal financing gives you access to more funds than a credit card and at a lower profit rate. This is handy for bigger-ticket items or projects that will take you a bit longer to pay off. This financing is usually unsecured, meaning you don't need to provide collateral.
Types of personal financing:
Personal installment financing: open for use with many kinds of purchases or projects – you decide how the money is spent. You can often apply online and the approval process is relatively quick. You also get instant access to the money.
Revolving credit facility: financing with a monthly payment plan that you can easily refinance from. This makes it easier than re-applying for a new financing if you run into cashflow problems.
Debt consolidation: takes your smaller financing and combines them into a single debt. There are 2 major benefits: consolidation debts usually have a lower profit rate than your other ones, and they simplify things by giving you only one monthly payment to remember.
Pros for personal financing: Long financing tenors of up to 7 years; lower profit rates than credit cards, higher financing amounts
Cons: Possible penalties for paying the financing early. When looking for personal financing, check to see if it charges early settlement fees.
Tip: Make use of a "Monthly Payment Calculator" to see what you can comfortably commit to pay.
Taking out a housing financing will most likely be one of the biggest financial decisions of your life. You can take out a financing to buy a new home, invest in commercial property or refinance your existing home financing.
The amount that can be financed is called the financing-to-value (FTV) ratio. The maximum FTV ratio for banks is 75%, which means up to 75% of your property price or value (whichever is lower) can be financed.
Pros: Access to a large sum of money, long tenors, low profit rates
Cons: If you fail to pay your installments, the financier would have the right to auction your property
Tip: Start saving for your deposit early for a larger down payment; this is big responsibility – talk to a professional for key questions to ask.
Manage your cash responsibly
How you manage your cash will vary depending on your needs. You're not going to buy your house with a credit card. Nor should you take out a personal financing for your next flight and hotel stay.
Risks around financing include extra transaction fees, sky-high profit rates, retracted promotional rates, loss of rewards points, impact on credit scores, revolving debt or even bankruptcy. Do some research on the pros and cons of different options available to you, and get some professional advice. Shop around and get financing only when you need it.
If you're still unsure, give us a call to discuss which option will best suit your needs.
HSBC smart money management tips
Just like you shop around to get the best deals for clothes, food and trips, you should carefully consider any financing you take. Quick cash usually comes at a cost, so plan ahead and budget what you need to find more affordable options. Here are some good ways to prepare:
- assess your payback ability
- compare profit rate
- shop for profit rate discounts
- practice good financial habits
- keep your supporting documents updated
- make a budget
- get advice for your personal finances
- educate yourself (helpful articles to guide you to better financial health)
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