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Personal Loan Interest Rates: How do lenders calculate them?

Personal loan interest rates depicted on a balancing beam in the hands of someone, tentative to rise or fall.

Personal loan interest rates may vary depending on who you’re taking a personal loan in Singapore from. And while you may already know the textbook methods to find the lowest personal loan interest rates, rates can only get as low as a lender’s own calculations. 

Lenders may calculate interest rates based on a few factors. Knowing what these are can help you be prepared to get a realistic idea of how much your loan’s interest rate might look like. And while you’re at it, you can find the best and lowest personal loan Singapore with Personal Loan Finder

Read our guide to uncover secret tips and tricks to finding the lowest interest rate personal loan in Singapore!

When you borrow from someone, they’re doing you a favour. But when you borrow money from a licensed moneylender, a bank, or any other financial institution, then giving you a loan is also offering you a service.

So, interest rate is essentially a service charge that you’re charged for your loan. It’s the price that you pay to borrow money. 

There are a few ways that interest rates are calculated on a personal loan in Singapore. Following that, it’s actually a combination of your financial standing and the calculation method of the lender that will influence personal loan interest rates,

Typically, there are two types of interest calculations commonly adopted by licensed moneylenders. You should make sure to know the difference between the two so that you can make accurate comparisons when looking for the lowest personal loan rate in Singapore.

First, is the flat rate interest rate. This is an uncomplicated way to calculate interest. When it comes to flat rates, your interest amount is calculated based on your original loan amount throughout the duration (tenure) of your loan. 

This means that your interest amount remains constant, without reducing, even though your pending loan amount might be reducing as you repay it. Flat rate calculation is actually quite common when it comes to personal loan interest rates. 

Here’s an example of what it means to have a flat interest rate of 2% interest rate, for a loan of $12,000 to be repaid over 12 months.

In this case, it doesn’t really matter how much of your loan you repay within a certain duration. Your interest payable will always remain at $20 a month. This interest amount will be incorporated into your monthly repayments. 

Month

FLAT RATE CALCULATION

#

EMI

Interest

Principal

Balance Due

1

1020

20.00

1000.00

11000.00

2

1020

20.00

1000.00

10000.00

3

1020

20.00

1000.00

9000.00

4

1020

20.00

1000.00

8000.00

5

1020

20.00

1000.00

7000.00

6

1020

20.00

1000.00

6000.00

7

1020

20.00

1000.00

5000.00

8

1020

20.00

1000.00

4000.00

9

1020

20.00

1000.00

3000.00

10

1020

20.00

1000.00

2000.00

11

1020

20.00

1000.00

1000.00

12

1020

20.00

1000.00

0.00

So you’ll have to pay $20 in interest every month. Add this to your monthly borrowed amount repayable ($12,000/12 months) and you’ll be left with the amount of approximately $1020 to be repaid monthly.

In total, you’ll have to repay $12,240 in total for the entire loan.

Typically when you repay a loan, the amount that you repay at whatever frequency is called an Equated Monthly instalment (EMI). This is usually a fixed amount that you repay each time, and it comprises part of the principal amount you borrowed through the loan, plus, the interest on your loan.

When it comes to reducing balance personal loan interest rates, the amount you’ve already repaid from the principal amount gets subtracted from interest rate calculations. 

Say, for example, that you’ve just paid the first EMI for your loan. The amount that you’ve just paid is “cleared”, and the interest you have to pay next month will only be based on the balance principle loan amount you’ve got remaining to pay.

Let’s take a look at how this might look for a loan of $12,000 with a 2% interest rate, to be repaid over 12 months. 

 

Month

REDUCED BALANCE CALCULATION

#

EMI

Interest

Principal

Balance Due

1

1011

20.00

990.87

11009.13

2

1011

18.35

992.52

10016.62

3

1011

16.69

994.17

9022.44

4

1011

15.04

995.83

8026.61

5

1011

13.38

997.49

7029.13

6

1011

11.72

999.15

6029.97

7

1011

10.05

1000.82

5029.16

8

1011

8.38

1002.48

4026.67

9

1011

6.71

1004.16

3022.52

10

1011

5.04

1005.83

2016.69

11

1011

3.36

1007.51

1009.18

12

1011

1.68

1009.18

0.00

Observe how the interest amount reduces as the loan is repaid, with the 2% interest rate being calculated upon the balance principal amount to be paid. In such a scenario, a reducing balance personal loan rate has clear benefits.

Finding the right personal loan interest rates can make a world of a difference for you in the long run. 

When you pay EMIs for a loan, you pay some part of the Principal and some part as Interest on your loan. In Reducing Balance rate, the paid-up EMI’s Principal portion is “reduced or subtracted” from the subsequent EMIs Interest calculation, or in other words you pay interest on balance principal. Effectively, you pay lesser Interest as you keep paying more EMIs, and hence the Total Interest on your loan amount is lesser in the case of Reduce Rate Loans.

At the time of writing this, banks in Singapore offer interest rates on personal loans ranging from 3.4% to 5.43%, although banks are known to offer personal loan interest rates as low as 1%.

With that said, if you’re looking for a personal loan in Singapore from licensed money lenders, you can expect an interest rate of about 4% per month. While this may be higher than much of what banks offer in certain scenarios, licensed money lenders might accept your loan application in as little as hours, even if you may have bad credit.

When you’re getting a personal loan in Singapore, your interest rate might also be influenced by the loan amount that you’re taking. In general, long-term loans may have lower interest rates, and shorter-term loans might have higher interest rates.

If you’re looking for a personal loan in Singapore, you can use Personal Loan Finder to find the lowest rates. 

Choose from our list of licensed moneylenders for a variety of loans, including personal loans, business loans, bridging loans, personal loans, microloans, foreigner loans, and more.

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