You will be able to explain how a renovation loan differs from a personal loan and when it is the better choice.
Siti and her husband have just collected the keys to their BTO flat in Tengah. Their interior designer's quotation comes to S$30,000. They have S$12,000 saved for it, so they need another S$18,000. Their bank offers a personal loan in two taps. Their designer mentions that they could also pay part of it by credit card in instalments, "no paperwork". And somewhere in the bank's app is a third option, a renovation loan, which takes longer to apply for and asks for documents.
The third option is often the cheapest of the three, and the paperwork is the reason.
A renovation loan is a loan that can only be used for renovation work on your home. That restriction is what separates it from a personal loan, which you can spend on anything. Because the bank knows exactly where the money is going, and can check, it usually offers a lower rate than on a personal loan.
The way the money moves reflects that. With a renovation loan, banks usually pay the contractor or interior designer directly, against the quotation or invoices you submit, instead of paying the money into your account. Some pay in stages as work is done. The application asks for the quotation, details of the contractor and your income documents, and approval takes longer than a pre-approved personal loan.
Renovation loans are usually quoted on a flat rate, like car and personal loans, so the EIR is again the figure to compare. They also carry their own fees, and their own rules on repaying early.
Banks cap how much you can borrow on a renovation loan, and the cap usually depends on your income as well as on a maximum amount set by the bank. Check the current limit with the lender, because it varies between banks and can change. If the cap is lower than what you need, the gap has to come from savings or another source.
The purpose restriction also means some costs may not count. Banks generally fund the renovation work itself. Whether furniture, appliances and other items you could take with you when you move are covered is up to each bank's rules. Siti's quotation includes built-in carpentry, flooring, electrical work and a sofa. She should expect to ask the bank which of those lines it will fund before assuming the full S$18,000 can come from the renovation loan.
Here is Siti's comparison with example figures. Neither is a real bank's offer.
The renovation loan is S$18,000 at 3% flat over three years, with no processing fee. Interest is S$18,000 times 3% times 3, which is S$1,620. She repays S$19,620, an instalment of S$545 a month, and the EIR is about 5.7%.
The personal loan is S$18,000 at 4.5% flat over three years, with an example processing fee of 1%, S$180, taken from the loan. Interest is S$2,430, so she repays S$20,430 at S$567.50 a month, but she receives only S$17,820. The EIR is about 9.1%.
On these figures, the renovation loan saves S$810 in interest and the S$180 fee, about S$990 in total, and it costs S$22.50 a month less. The price is the paperwork and the time it takes. The personal loan wins on speed, and it will pay for the sofa.
The designer's offer to take payment by card instalments sounds like the easiest of all. Sometimes it is a genuine 0% plan with no fee. More often there is a catch, and it is worth asking about each of these before agreeing.
A bank card instalment plan may charge an upfront fee or interest, as lesson 4.1, How BNPL makes money when you pay no interest, explained. The full amount usually blocks your card limit until it is repaid, which can push your use of available credit high, the behaviour lesson 1.3 said can weigh on your credit record. And if the instalments are more than you can clear each month, the shortfall becomes an ordinary card balance at card rates.
To see how far apart those costs can be, take the example 26% card rate from module 2. If Siti paid the S$18,000 by card and repaid it at about S$560 a month, roughly what the loans cost each month, it would take 56 months and cost about S$13,146 in interest. That is the extreme case of carrying the whole sum, but it shows why "no paperwork" is not the same as cheap.
A renovation loan tends to win when the work is mostly fixed renovation, the amount fits within the bank's cap, and you can wait for approval. A personal loan may still make sense for items the renovation loan will not fund, or when speed matters more than the rate. Paying a contractor by card only makes sense when it is a genuine 0% plan with no fee and you are certain you can pay every instalment in full.
The comparison that settles it is the one Siti did: the same amount, the same term, on EIR, fees and what the money can be used for. Ask one bank for the terms of each product, and put them side by side.
Get one renovation loan's terms and one personal loan's terms and compare them on EIR, fees and what the money can be used for.
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