Thinking of applying for a personal loan and wondering how these loans work? Personal loans are unsecured loans and are the most common types of loans in Singapore. These loans do not require you to attach any form of security (security is usually in the form of an asset, preferably immovable), unless the amount is huge. Personal loans can be borrowed at a rate of interest and can be repaid over a fixed loan tenure. The loan can also be cleared before the tenure period; banks charge a certain percentage of the balance amount as loan closure fees.
Banks in Singapore offer personal loans to Singaporean citizens and residents at varied interest rates. Banks take a call on the interest rate – the interest on loan products are solely determined by the bank. While such is the case, banks usually fix rates with the intention to make their product competitive in the market.
The interest rate on a personal loan is calculated on an annual basis. If you are applying for a personal loan at a particular interest rate, the rate is computed annually. So, say for instance you’ve been sanctioned a personal loan for S$10,000 and the interest rate offered by the bank is 5%, that 5% is applicable on a yearly basis i.e. the interest amount is calculated at the rate of 5% every year.
Customers are given an opportunity to decide their loan tenure – the total time period for repayment of the loan. Usually, the tenure is dependent on the loan amount – larger the amount, longer the tenure, and more the amount paid towards interest. As a potential customer, if you wish to reduce your interest payment, you should probably consider having a short repayment period. Also, longer tenures have relatively lower rates of interest in comparison to shorter tenures, but the amount paid towards interest will always be larger in case of longer loan tenures.
When you login to bank’s website and check out the interest rate on the personal loan offered by the bank, you’d find that the bank if offering the loan product at a particular interest rate known as the Effective Rate of Interest. The question that immediately arises is – what is this Effective Rate of Interest. Well, let’s find out what it means to you.
Effective interest rate factors in the aspect of compounding while computing the amount owed towards interest. Basically, the Effective Interest Rate (EIR) evinces the real cost (the interest in the loan) of borrowing. The EIR is computed on the remaining loan balance at a compounding rate and reflects the real cost of borrowing depending on whether you’ve opted for monthly repayments or lump sum repayments.
The Actual Interest rate on the other hand, does not factor in the compounding aspect. This rate is stated by banks on all their loan products – but the cost of borrowing, in terms of the interest you’d be paying – isn’t accurately reflected in the Actual Interest rate. This is because the value of the Actual Interest Rate is much lower than the EIR for the loan.
So, if you are borrowing a loan at say 10% p.a. (Annual Interest Rate), the Effective Interest Rate will be much higher, because it computes the compounding element on the remaining loan balance, each month after the monthly payment for that particular month is made. So, if you are to get a true picture of the interest amount on your loan, you should be looking at the Effective Interest Rate on your loan amount.
Anybody applying for a personal loan would certainly want a low rate of interest. While banks fix their personal loan interest rates at a particular value – banks take into account interest rates offered by other banks while fixing their rates in order to make their product more competitive – you can negotiate on a reduced interest rate on the basis of certain parameters. Let us observe some of these parameters that might enable you to get a reduced interest rate on your loan.
If you already have a relationship with the bank, say you have a credit card from the bank you wish to apply for your personal loan from, you can negotiate to get a lower interest rate. The bank will most likely entertain your case if you’ve been making regular repayments towards your monthly credit card bills.
A good credit score is another factor that can come to your rescue if you are looking for a reduced interest rate on your loan. Negotiating your loan interest rate to bring it down by a few basis points on the premise of a good credit score works more often than not.
So, if you wish to apply for a personal loan, you should definitely be looking at the EIR on the loan.