Chapter Two

Information sheet-2 Identify and discuss the range of credit options available

What Is a Credit Facility?

A credit facility is a type of loan facility given to your business by a bank, which
provides capital that you can draw on any time you need it. Credit facility is an
agreement with bank that enables a person or organization to be taken credit or
borrow money when it is needed.

The concept of Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution

of financial assets over time, between the lender and the borrower..in a loan, the

borrower initially receives or borrows an amount of money, called the principal,

from the lender, and is obligated to pay back or repay an equal amount of money to

the lender at a later time. Typically, the money is paid back in regular installments,

or partial repayments; in an annuity, each installment is the same amount.

What's the Difference Between a Credit Facility and a Loan?

When you negotiate a bank loan, you agree to borrow a fixed amount of money for
a fixed period of, say, five or 10 years. When the loan closes, the full amount of
the loan goes directly into your bank account. It doesn't matter whether you use
all of the money: you still have to pay the entire amount back with interest at the
agreed rate.

Another difference worth emphasizing is that you only pay interest on the amount
you withdraw, rather than on the entire credit facility you have been granted. So,
the interest starts to accrue from the day you borrow the money, so you'd be
paying interest on the first withdrawal of birr. Interest rates vary widely and
depend on the usual range of factors, such as the company's creditworthiness and
risk profile. Overall, you should expect to pay a higher rate than you would for a
regular bank loan. That said, since you're only withdrawing essential amounts for a
few months or weeks, the cost of borrowing could work out cheaper in real terms.

Why Do Businesses Use Credit Facilities?

Imagine that your main customer is late in paying your invoice and you were relying
on that money to pay your rent or payroll expenses. Now imagine that a key piece
of machinery breaks down and you need to fix it fast before production grinds to a
halt. A credit facility offers an instant solution to these and other setbacks that a
business might face concerning its cash flow and expenses. In many ways, it acts as
a revenue back up or financial insurance policy to the business.

Of all the types of bank facilities, a credit facility is perhaps the most flexible .
Growing businesses find it especially helpful to be able to dip in and out of an
overdraft-style pot whenever they need some additional support. And drawing
funds is just about the fastest way to access capital aside from accessing your own
bank account. Since you're not being forced to borrow a predetermined amount,
there's much less risk of over-borrowing and paying interest charges or early-
payment penalties on money that you didn't need.

What's more, credit lines don't generally require collateral or business valuations.
The bank will put you through an application process, and you probably will need to
supply some financial information and annual revenue projections. But once the
credit line is set up, you can borrow from it over and over as long as your
outstanding balance allows.

The Various Types of Credit Facilities

Some of the commonly used credit facilities in Singapore today are as below;

A) Credit Card

With a good credit history and steady income, you may qualify for credit cards at
the bank. The card issuer will usually assess your repayment ability before deciding
whether to accept your application and what credit limit to be set. Also, your
credit card can be used to purchase items in most places. Different credit cards
have different interest rates for different types of activities, like purchases,
cash advances or balance transfers, so do remember to read the fine print.

B) Personal Loan
Personal loans are mostly unsecured in nature. They do not require collateral such
as a car or house in order for a loan to be extended to you. Their unsecured nature
makes personal loans attractive to those who require finances to meet short term
personal and business needs.

C) Bridging Loan
If you do need assistance on the initial cash down payment of your property
purchase, a Bridging Loan can be extended to you while you are still in the process
of selling your Housing and Development Board (HDB) flat or private property. For
example, let say You can borrow up to 15% of the purchase price or fair market
value (whichever is lower) at 6.5% p.a. (1% above prime rate*) and the maximum
tenor of the Bridging Loan is six months.

During the tenor of the loan, you can choose to service the interest only and repay
the principal amount once you receive the cash proceeds from the sale of your
existing property.

D) Motor Vehicle Loan

The bank supplies a definite sum of money, intended for the purchase of a suitable
vehicle, to an individual who qualifies against a list of requirements that establish
the said individual’s financial history and repay can be deemed as secured loans that involve the
purchased vehicle as the
collateral. The process of acquiring a car loan in Singapore is easy enough, and it
majorly depends on your compliance with the minimum age requirement, nationality,
gross family income, clean credit history and employment stability that equates to
a dependable source of income.

E) Bank Overdraft
Overdrafts are an extension of credit from a bank when an account reaches zero.
An overdraft allows the individual to continue withdrawing money even if the
account has no funds in it. You can arrange a bank overdraft on the account your
salary is paid into. This means your account can be overdrawn. The interest rate is
much higher than the prime interest rate. You do not have to repay the overdraft
within a fixed time, but the bank will review it at least once a year, and choose to
withdraw it at any point of time.

F) Restructured Loan
Restructured loans are overdue loans where a bank has negotiated for a change in
repayment terms with the borrower and payments are still being made in
accordance with the repayment terms.

G) Housing and Development Board (HDB) Loan

HDB loans are offered by HDB or the banks and they provide tenures of up to 25
years if you pay a minimum 20% down payment (at least 5% in cash), and use your
CPF to pay off 15% or more for the balance down payment depending on the loan
amount that you want. You will have the option to extend your loan tenure to 30
years if you are going for a 60% loan or less (capped at age 70). These loans are
well suited for individuals who can afford to place a large down payment and take a
smaller home loan.

H) Renovation Loan
Purchasing a house is one of the most important financial decisions you will ever
take in your life. Everyone deserves to live in a home of their choice, complete with
the furnishings and appliances they would want. Renovation loans help home owners
renovate their new homes, be it to make repairs to the roof, plumbing, walls, paint,
and fixtures.

I) Education Loan
If you are planning to study locally or overseas, there are various flexible study
loans offered by banks and financial institutions to finance your studies. With an
education loan, you can finance your tuition fees, focus on studying and do better in
the classroom.

J) Medical Loan
Medical loans are available to help ease the financial stress away and offer you
peace of mind. They will ensure your family member gets the medical care they
require, while the loan takes care of the ensuing medical bill. The loans are
structured according to your financial situation and repayment ability regardless
of the medical emergency.

2.2 The Differences between Unsecured and Secured Loans

What is a secured loan? Definition and examples

A secured loan or secured debt is when the borrower has committed to give the
lender certain assets, such as a real estate property or a car, if he or she defaults,
i.e. fails to make payments. The lender has recourse to seize the asset and sell it
to recoup the money lent.

The asset the borrower puts up as security is called the ‘collateral’ontheloan.The

practice of pledging an asset as collateral on a loan is known as hypothecation.

When a homebuyer takes out a mortgage, the house being bought is put up as
collateral, making it a secured loan. If the mortgagor (borrower) defaults, the
lender will take possession of the house and sell it in order to recoup its money –
this is known as foreclosure.

If after selling the collateral there is not enough money to pay off the debt, the
lender may try to obtain a deficiency judgment against the borrower for the
remainder. With non-recourse secured loan the collateral is the only claim the
creditor has against the borrower.

A secured loan is the opposite of an unsecured loan, as occurs with most credit
card purchases when the issuer lends the card holder money and no collateral is
involved.
As the risk is lower for the lender, secured loans tend to charge
lowerinterestrates compared to unsecured debt.Otherfactors will also determine
how much
interest the lender will charge, including th history, age, and ability to repay.

Examples, let’s say that youuse. So,wantyougoouttoandtakecontact a bankho and ask

for a housing loan. The bank says that they will give you the housing loan
without any issue, but there’sTheconditionisyouonlyneedtoonekeepcondi the house as collateral
to the bank until the loan amount and the interest charges
are paid off in full. Bank also says that as also offer you a reduced interest rate that is much
lower than an unsecured loan.
You happily agree and go for the housing loan and buy your dream house. This is
how it works

Advantages of a secured loan

A. With this type of loan the lender is relieved of much of the risk, which
permits the second advantage.
B. The borrower is more likely to get better terms than what would be
available with an unsecured loan. He or she can probably borrow more and
pay back over a longer period. In many cases, without putting up collateral
the borrower might not be able to get the loan he or she wants.
C. For individuals with a poor credit rating, this may be the only way they can
borrow money.
D. A secured loan is a good way to improve your credit rating (as long as you pay
on time).

What is a unsecured loan? Definition and examples

Unsecured loans are loans that are approved without the need for collateral.
Instead of pledging assets, borrowers qualify based on their credit history and
income. Lenders do not have the right to take physical assets (such as a home or
vehicle) if borrowers stop making payments on unsecured loans.These loans are also
known as “signaturens”becauseloayour signature on the you bring to the table. You promise toby
repay, pledging collateral.
to a bank and talk to them about an education loan. They tell you that up to a certain extent,
the bank will offer you a loa if you take more amount than that you would need to keep
collateral against the
educational loan that you would want to take.

You talk to your parents and they tell you that they will offer you a portion of the
money. And after computing, you find out that you can take an unsecured loan from
the bank and the rest of the amount you can pay from your savings and from your
parents’ savings.

Types of Unsecured Loans

Unsecured debt comes in several forms.

 Credit cards are a common form of unsecured loan. Even though you might
not think of them as “loans,” you borrow m card.

 Student loans are often unsecured. Although some people take cash out
of their homes to pay for school, pure student loans through the
Department of Education are typically unsecured.
 “Personal”,availableloansfrombanks, credit unions, and online lenders
areunsecured loans you can use for any purpose you want.

2.3 The Personal Loans Credit Cards, Store Cards and Overdraft
A credit card loan or credit card debt is money you borrow when you use your credit
card. Credit cards allow us to buy things when we either don to use cash. People may also prefer to
pay by credit card because it
offers convenience, security, and easy tracking.

When you buy something using your card, the issuer loans you the money to make the purchase.
You will have to pay back the loan will also have to pay interest on that loan
What is store card?

a credit card issued by a large department store, which can only be used
for purchases in that store. Store credit cards often aren’tor general use, credit cards branded with
a major processing network. store credit cards
can only be used in a specific store or family of stores. They're just like any other credit
card, but purchases made in the affiliated store will typically earn higher rewards or
other benefits

Characteristics of store card

A) Limited Use

B) Higher Interest Rates-Store credit cards often have higher interest rates than regular
credit cards

C) Restrictions on Rewards-With store credit cards, rewards are relatively difficult to

earn and have limited options for redemption. Most every store credit card only
rewards you on purchases you make in that store

D) Credit Limits

Store credit cards usually have low credit limits,

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The concept of Overdraft

An overdraft is a service provided by a bank which allows a customer to continue to

make payments or withdrawals from an account even when there is not enough money
in the account to cover them. In effect, an overdraft is a form of credit, which attracts
interest charges for as long as you are overdrawn.

Are there different kinds overdrafts?

Yes, there are authorized and unauthorized overdrafts.
An authorized overdraft is one where your bank has agreed that you can have an overdraft,
which exists for you to take advantage of at any time within an agreed period, up to an agreed
amount. It costs you nothing in interest charges if you do not use it. Onthe other hand if your
account goes overdrawn without th exceed the limits set in an authorized overdraft, then this
is an unauthorized overdraft.

The bank is not obliged to give you an unauthorized overdraft. As a general rule, when you do
not have an authorized overdraft in place, then any cheques or withdrawals for asum higher
than the amount available in your bank may not honor them and may make a charge for
returning the item.

How do I apply for an overdraft?

If you believe that there are likely to be times when the funds available in your account will
not meet your expected outgoings for a short period, then you should contact your bank and
discuss whether it would be possible to have an overdraft facility