Everyone faces some degree of financial uncertainty in their lives, some more often than others. The most common solution for most of us is to obtain a loan in Singapore. This can be in the form of a casual arrangement with a friend or relative, or a formal loan from a bank or licensed moneylender.
Formal loans come with specific criteria for repayment, including the additional cost of interest rates above the loan principal. These interest rates are not static and depend on several criteria.
The first of these is the prevailing economic environment; rates are lower during recession and higher during economic booms. The second includes unique and unpredictable factors. For example, events like the Covid pandemic can cause widespread instability that can lead to lower rates.
There are several personal criteria as well. An applicant’s financial standing, level of debt, employment status, and recent financial history all affect the interest rates on a loan.
Before applying for a loan, you should also consider whether a loan from a bank or licensed money lender is the better option for you. If you are facing financial problems, it can help you ride through the rough period.
The short answer to that question is – so you don’t throw away your hard-earned money.
Understand that rates vary by type of lender, the type of loan (personal, business, consolidation, etc.), loan term (minimum repayment period), and other factors. Savvy borrowers also keep track of cyclic trends in interest rates, which can be used to predict when the figure will rise or fall.
Remember, a seemingly miniscule difference of just 0.1% can snowball into a significant amount over the course of the loan.
The typical interest rate charged by licensed moneylenders varies between 1% and 4% per month. This upper limit of 4% is a figure set by the Ministry of Law.
However, a licensed money lender is allowed to charge an additional late interest rate of 4% per month on overdue payments. They may also impose a late repayment penalty fee, capped at $60 per month. A 10% processing fee may also be imposed when you take up the loan.
These are some factors that may affect interest rates offered to borrowers:
● Credit score – based on the current and recent financial history of the applicant
● Income – a higher income generally indicates a lower-risk applicant
● Credit utilisation with other lenders – every person is given a debt limit and the closer to that limit they get, the higher the risk
Private money lenders do not use a flat rate method to calculate interest. Instead, they apply the reducing balance method. While the calculations mat be simpler with a flat rate, the reducing balance method saves you money.
Let us consider an example where a borrower takes a $3,000 loan to be repaid in 3 months.
● Month 1 – Outstanding amount: $3,000; Interest: $2.50; Instalment paid: $1,002.50
● Month 2 – Outstanding amount: $2,000; Interest: $2.50; Instalment paid: $1,002.50
● Month 3 – Outstanding amount: $1,000; Interest: $2.50; Instalment paid: $1,002.50
The minimum total amount paid over the course of 3 months is $3,007.50.
● Month 1 – Outstanding amount: $2000.83; Interest: $2.50; Instalment paid: $1,001.67
● Month 2 – Outstanding amount: $1,000.83; Interest: $1.67; Instalment paid: $1,001.67
● Month 3 – Outstanding amount: $1,001.66; Interest: $0.83; Instalment paid: $1,001.66
The minimum total amount paid over the course of 3 months is $3,005.
So, the borrower would have paid 50% more interest using the flat rate method.
Bank loan interest rates generally range from 3.5% to 11% per annum on paper. After including fixed charges, processing fees and other miscellaneous expenses, this figure may rise to between 6.5% and 20% p.a.
As with loans from licensed lenders, you should consider the fine print and not just the advertised rates. The most important piece of information you need is the effective interest rate (EIR).
EIR gives you a more accurate impression of the cost of your loan than just the advertised rate. It factors in mandatory costs such as processing and administrative fees.
Let us again consider an example where a borrower takes a $3,000 loan to be repaid in 3 months. The interest rate is 10% but there is a bank processing fee of 1%.
The total amount to be repaid = Principal + Interest + Processing fee = $3,000 + $300 + $30 = $3,330
The EIR here is 11% despite the official interest rate of 10%.
Remember that the repayment frequency and number of instalments also affect the total amount to be repaid. This is because interest is calculated with every instalment – you pay more in interest every time.
Loans can be a wonderful tool for financial independence if you make good use of them. Otherwise, they can become a source of additional financial stress instead.
Always be aware of the additional costs of a loan. This may include:
● Late payment interest rates and penalties
● Administrative fees and processing fees
There are also other factors to consider:
● Credit history – Banks will immediately refuse a loan to anyone with a poor credit rating. Money lenders do not usually consider your rating before extending a loan. However, they are generally more expensive so always try to get a bank loan first.
● Credibility of lender – Not all money lenders are the same. Some offer greater flexibility and terms than others. It’s important to choose the right lender. Check out more tips about obtaining the right loan here.
We understand that choosing the right loan and comparing rates can be time-consuming and confusing. This is why we are here to help.
Get an instant loan with reasonable interest rates with us – reach out to us today.