Personal loans are one of the more basic loans provided by licensed money lenders in Singapore. When used correctly, personal loans can effectively help individuals through their financial difficulties.
If you’re considering taking out a personal loan, it’s important to learn how interest rates, tenures, and repayment schedules work. It’s essential to understand these terms to ensure that you can afford to pay back the loan on time.
Our guide covers these important terms you need to know before signing on the dotted line, ensuring you make an informed decision.
Understanding Interest rates
In Singapore, interest rates vary depending on the type of loan and the lender. It’s essential to understand the different types of interest rates that can apply to your loan.
1. Flat Interest Rate
With a flat interest rate, the interest charge is calculated based on the original principal amount, regardless of the remaining balance. This means that the interest charge is fixed throughout the loan tenure, making it easy to calculate your monthly payments.
However, it’s important to note that the effective interest rate (EIR) of a loan with a flat interest rate may be higher than a loan with a reducing balance interest rate, as you’re paying interest on the original principal amount throughout the loan period.
2. Reducing Balance Interest Rate
With a reducing balance interest rate, the interest charge is calculated based on the remaining balance of the loan. This means that as you pay off your loan, the interest charge decreases, and you pay less in interest over time.
Here is an illustration of a payment breakdown month by month for the loan of SGD 10,000 with a 6-month tenure and a monthly interest rate of 3% based on reducing balance interest:
| Month | Starting Balance | Monthly Payment | Interest | Principal | Ending Balance |
| 1 | SGD 10,000.00 | SGD 1,893.16 | SGD 250.00 | SGD 1,643.16 | SGD 8,356.84 |
| 2 | SGD 8,356.84 | SGD 1,893.16 | SGD 208.79 | SGD 1,684.37 | SGD 6,672.47 |
| 3 | SGD 6,672.47 | SGD 1,893.16 | SGD 166.18 | SGD 1,726.98 | SGD 4,945.49 |
| 4 | SGD 4,945.49 | SGD 1,893.16 | SGD 122.13 | SGD 1,771.03 | SGD 3,174.46 |
| 5 | SGD 3,174.46 | SGD 1,893.16 | SGD 76.60 | SGD 1,816.56 | SGD 1,357.90 |
| 6 | SGD 1,357.90 | SGD 1,893.16 | SGD 29.56 | SGD 1,863.60 | SGD 0.00 |
The total repayment amount using the reducing balance interest rate calculation is SGD 11,358.98, whereas, if flat interest rates were applied, the total repayment amount would have been SGD 11,800.00.
3. Variable Interest Rate
With a variable interest rate, the interest charge can fluctuate over time, depending on market conditions. This can be advantageous if interest rates are expected to decrease, as you may end up paying less in interest over the loan tenure.
However, it’s important to note that the opposite can also happen, and your interest charge may increase over time, leading to higher monthly payments. Variable interest rates usually apply to home loans.
Understanding Tenures
The loan tenure generally refers to the number of months or years you have to pay off the loan. Most lenders in Singapore offer plans that allow you to pay off the loan over monthly instalments.
When determining which loan tenure is suitable for you, you need to decide if each month’s repayment amount is attainable based on your monthly income and expenses. Even though it is easier to pay off a loan over a longer tenure —i.e. a lower sum payment each month— a longer loan term would usually mean higher interest payable for the entire loan.
The ideal would always be to find a plan that allows you to balance between paying off your loan as quickly as possible and your ability to meet the payment each month.
Taking on a loan adds to your financial obligations, so it is crucial to plan your personal budget accordingly and still save for urgent situations by preparing emergency funds. This will ensure that unexpected expenses or financial emergencies do not result in the defaulting of loan payments that can worsen your financial burden.
Understanding repayment schedules
When taking out a loan, it is essential to consider the interest you would be liable for eventually. If you cannot pay off the total sum, including the interest payments, you might be liable for late payment or incomplete payment fees.
Fees may not just apply to late payments but early payments as well. Hence, before taking up the loan, it is important to check with your lender if you will be liable for such fees before committing to a loan repayment schedule that you are comfortable with. It is also vital to ensure that you take up the loan from a licensed moneylender in Singapore as they are less likely to offer loans with hidden fees.
To learn more about borrowing money the smart and right way, read this article.
Conclusion
Personal loans are handy when you encounter a situation that calls for a large volume of cash at short notice. Apart from interest, most moneylenders in Singapore charge processing fees and late payment fees for personal loans. It’s important to read the loan terms and conditions carefully to understand the full cost of borrowing, including any additional fees and charges.
Knowing the elements involved before taking up a personal loan can help you plan an effective loan repayment schedule to assist you on your road to paying off your debts.
Need a quick solution for your short-term cash flow problems? Goldstar Credit provides expedited personal loan approvals, with same-day fund disbursement. Head down to our Toa Payoh or Hougang branches or call us to discuss your options with our loan officers.
About the Author
Instituted since 2009, Goldstar Credit is a proficient licensed lender through and through. We pride ourselves on sharing our extensive personal finance expertise and knowledge with anyone and everyone who is keen on learning more about them.
