How To Calculate Interest on a Loan in Singapore (2022)

how to calculate interest on a loan

With today’s inflation and the rising cost of living, it is not surprising that many of us are struggling to stay on budget. A personal loan is a good option for managing financial challenges. But before taking out a personal loan, you need to know whether you can afford the monthly repayments.

To determine the exact amount of the monthly payments, you must learn how your interest rate is calculated. Interest is a fee that is charged by banks and other financial institutions for allowing you to borrow a certain amount. This is the cost of borrowing the money.

Understanding how to calculate your interest will help you compare as well as negotiate your interest rate. Here are some of the ways to calculate your interest and what your monthly payments will look like.

How Personal Loan Payments Work

Personal loans are an excellent option if you need funds to purchase big-ticket items or for immediate financial emergencies. So when taking out a personal loan, here are a few things you need to understand:

  • Principal Loan Amount: This is the total amount you’re borrowing from the bank or licensed money lender.
  • Interest: This is the cost of borrowing money from the bank or legal lender. You will start accruing interest when the loan is disbursed. The amount of interest that will be paid will depend on:
    1. The amount of money you borrowed (i.e. the principal loan amount)
    2. The rate at which the interest is charged (i.e. the interest rate)
    3. The length of time taken to repay the loan (i.e. the loan tenure)
  • Fees: Aside from interest, you will also need to pay additional fees. These are extra costs of taking out a personal loan, such as the processing fee, late payment fee, and more.
  • Loan Tenure: This is the length of the loan repayment. Personal loans in Singapore can range between 1 year and 7 years. With a licensed lender, the maximum loan tenure you can avail for a personal loan is only up to 12 months.

Your monthly payment will be based on your principal, repayment term, and interest rate. 

A S$10,000 loan paid over 4 years will have a lower monthly repayment than a S$10,000 loan paid over 3 years. This is because the payments are spread out over a longer period. However, with a longer tenure, you’ll be incurring higher interest.

Whether you’re borrowing from a bank or a licensed money lender in Singapore, these are the factors that affect your loan repayments. Some licensed money lenders provide flexible monthly loan repayments. It’s best to talk with the loan officer to get a quotation for your personal loan.

lady paying back loan

Loan Payment Formula

The basic loan payment formula includes your loan principal amount (P), interest rate (r), and loan term (T). Your principal amount is spread equally throughout the loan term, along with the interest charged due over the term.

Here’s the basic formula for calculating loan interest:

  • I = P*r*T

So say you borrowed S$6,100 at an interest rate of 6% per year with a maximum loan tenure of 3 years. Your total interest is S$1,098.

  • (6,100)*(0.06)*3 = S$1,098

That said, you will end up paying the bank or legal lender a total of almost S$7,198 over the life of the loan.

Note that the type of loan you have will affect the type of loan calculator you’ll need to use to determine your loan repayments.

Now that you’ve figured out your total interest, it’s time to determine your monthly payments.

Here’s a basic formula for the monthly loan payment:

Loan Monthly Payment Formula

(Figure from Time)

Using our previous example of a S$6,100 loan with a 6% p.a. interest rate for 3 years, here’s what you get:

  • A= 6,100 [(0.005 x 1.00536) / (1.00536 – 1)]
  • A= 6,100(0.030421937)  0.00598340262/0.196680525
  • A= S$185.57

In the above example, your monthly loan repayment would be about S$185.87.

Interest-Only Loans

If the lender uses the interest-only method, you’ll have to pay only the interest on the loan for a specified length of time. The principal amount stays the same during that period.

Consider this illustration:

Principal Loan AmountS$30,000
Annual Interest Rate6%
Loan Tenure5 years

To solve your annual interest costs, simply multiply your principal amount by your interest rate.

  • S$30,000 x 0.06 = S$1,800 in interest each year
  • S$1,800/12 months = S$150 in interest per month

Note that interest-only loans are only available for a specified period. When the interest-only period of your loan is over, you’ll need to repay the principal amount you borrowed.

Usually, interest-only loans turn into amortizing loans wherein you’ll have to make monthly payments on the principal amount and interest.

Amortizing Loans

Many banks and lenders charge interest based on an amortization schedule. For instance, mortgages and car loans fit into this category.

The monthly payment for amortizing loans is also fixed. However, the lender applies some of your payment towards your principal balance as well as interest every month.

Take a look at this illustration:

Principal Loan AmountS$30,000
Annual Interest Rate6%
Loan Tenure5 years

To calculate your interest:

  • Divide the interest rate by the number of payments you’ll make each year, usually 12 months
  • Multiply that figure by the principal loan amount

Here’s what it will look like:

  • 0.06/12 = 0.005
  • 0.005 x S$30,000 = S$150

S$150 is the amount of interest you’ll pay in the first month. However, as you pay off your loan, more payments will go toward the principal balance and less toward the interest.

Here’s an example amortization schedule:

MonthStarting Loan BalanceMonthly PaymentInterestPrincipalNew Loan Balance
1$30,000.00$579.98$150.00$429.98$29,570.02
2$29,570.02$579.98$147.85$432.13$29,137.88
3$29,137.88$579.98$145.69$434.29$28,703.59
4$28,703.59$579.98$143.52$436.47$28,267.12
5$28,267.12$579.98$141.34$438.65$27,828.47
6$27,828.47$579.98$139.14$440.84$27,387.63
7$27,387.63$579.98$136.94$443.05$26,944.59
8$26,944.59$579.98$134.72$445.26$26,499.32
9$26,499.32$579.98$132.50$447.49$26,051.84
10$26,051.84$579.98$130.26$449.72$25,602.11
11$25,602.11$579.98$128.01$451.97$25,150.14
12$25,150.14$579.98$125.75$454.23$24,695.90

How Does It Work For Licensed Moneylenders?

The computation of interest charged on a personal loan with a licensed moneylender in Singapore must be based on the remaining balance of the principal amount.

For example, if you take out a personal loan of S$20,000 and you have repaid S$5,000, the interest will be charged only on the remaining S$15,000.

That said, it works similarly with amortization loans. Note that licensed lenders can only charge a maximum interest rate of 4% per month.

Take a look at this illustration to make things clear:

Principal Loan AmountS$6,100
Interest Rate (per month)4%
Loan Tenure1 year
MonthStarting Loan BalanceMonthlyPaymentInterestPrincipalNew Loan Balance
1$6,100.00$649.97$244.00$405.97$5,694.03
2$5,694.03$649.97$227.76$422.21$5,271.82
3$5,271.82$649.97$210.87$439.10$4,832.73
4$4,832.73$649.97$193.31$456.66$4,376.07
5$4,376.07$649.97$175.04$474.93$3,901.14
6$3,901.14$649.97$156.05$493.92$3,407.22
7$3,407.22$649.97$136.29$513.68$2,893.54
8$2,893.54$649.97$115.74$534.23$2,359.32
9$2,359.32$649.97$94.37$555.60$1,803.72
10$1,803.72$649.97$72.15$577.82$1,225.90
11$1,225.90$649.97$49.04$600.93$624.97
12$624.97$649.97$25.00$624.97$0.00

How To Calculate Loan Interest

As previously mentioned, the basic loan interest formula includes your principal loan amount, interest rate, and loan tenure. You can use a loan calculator to work out how much you’ll be paying in interest.

If you want to try calculating interest on your own, you can use this formula:

loan interest calculation formula 2
  1. Banks express interest rates annually. Divide your interest rate by the number of payments you’ll make in a year, typically 12 months.
  2. Multiply it by the balance of your loan. For the first month, you’ll be applying the interest to your whole principal amount.

So using the illustration above:

Principal Loan AmountS$30,000
Annual Interest Rate6%
Loan Tenure5 years
Monthly PaymentsS$579.98
  •  0.06/12 = 0.005
  •  0.005 x S$30,000 = S$150

Your interest for the first month will amount to S$150.

loan interest calculation formula
  1. Deduct the interest you’ve just calculated from your monthly payment. This is the amount you’ve paid towards the principal loan amount.
  2. Take this amount away from the original principal and you’ll get the new balance of your loan.

This is what it’ll look like:

  • S$579.98 – S$150 = S$429.98 (principal paid)
  • S$30,000 – S$429.98 = S$29,570.02 (new loan balance)

To work out your next interest, use the same formula above but against the new loan balance.

  • 0.06/12 = 0.005
  • 0.005 x S$29,570.02 = S$147.85 (your next month’s interest)

Note that doing the calculations on your own will result in slight discrepancies due to rounding and human error. You can use a loan calculator to easily work out your interest on a loan.

How Does It Work For Licensed Moneylenders?

Licensed money lenders in Singapore calculate loan interest the same way. The interest charged on the loan is based on the remaining principal loan amount.

What if you failed to repay the loan amount on time?

The late interest can only be charged on the amount that is repaid late. The licensed moneylender cannot charge on amounts that are outstanding but not yet due to be repaid.

rising interest rate concept

Factors That Affect Your Interest Rates

Now you understand how interest rates work. The next step is understanding the various factors that affect how much interest you’ll be charged.

  • Income: This is one of the most crucial factors that will determine your personal loan interest. A rule of thumb to remember is that if you have a high monthly/annual income, banks usually charge a lower interest rate. For licensed moneylenders in Singapore, the maximum interest rate they can charge is 4% per month, regardless of your income.
  • Credit Score: Banks and other financial institutions have a stringent loan application process. As such, your credit score will play a crucial role not only in getting approved but also in how much interest you’ll be charged.

In a nutshell, a higher credit score can lead to lower interest rates. This is because a higher credit score is an indicator of good repayment of bills and debt.

Licensed moneylenders, on the other hand, do not put so much weight on a borrower’s credit score. They will also take into account your income.

  • Loan Amount: The total amount you borrow will affect how much you’ll pay in interest. The more money you borrow, the more interest you’ll pay. That said, don’t borrow more than what you need.
  • Debt-to-Income Ratio (DTI): The DTI ratio is an indicator that shows how much of your income goes to paying off your existing debts. It is a significant metric since it also affects your credit score.

A low debt-to-income ratio shows creditworthiness and repayment capacity. Thus, you’re more likely to avail of a lower interest rate. On the contrary, a high DTI ratio is an indicator of financial inability.

How To Get the Best Loan Interest Rates

Not all personal loans are created equal. Banks and financial institutions focus on certain criteria throughout the loan process to determine how much interest rate you’ll be charged. Here’s how to get the best loan rates:

Get a good credit score

A high credit score will help you get a better interest rate because banks and other lenders will see you as a low-risk borrower. The best part? A high credit score will also make you eligible for a larger loan amount and a longer repayment period.

So how do you build and improve your credit score?

  • Review your credit reports. Make sure to report any discrepancies early.
  • Pay your bills on time. Late payments on your credit card bills and other debt will negatively impact your score.
  • Keep your credit card balances in check. This means paying your balances in full. If you can’t do that, aim to keep your outstanding balances at 30% or less of your total credit limit.
  • Limit your requests for new credit. Keep in mind that every enquiry made to your account will be recorded. If you’re trying to improve your credit score, avoid applying for new credit for a while.
  • Consider debt consolidation. If you have outstanding debts, it may be beneficial to take out a debt consolidation loan at a lower interest rate. This will help you pay off your debt faster.

Most licensed money lenders in Singapore will not focus on your credit score. That said, even if you have a lower credit score than what is ideal, you can still get your loan approved as well as get a low-interest rate for a personal loan.

Have a Good Employment History

Another factor that can help you get a lower interest rate is having a good employment history. Banks and legal lenders will use this information to determine whether you can pay back the debt. That said, you may have to present documents, such as an employment letter or recent payslips.

A low or unstable income will make it more challenging to get a good interest rate or get approved for a loan.

Verifiable Income

If you’re a freelancer or a small business owner, don’t fret! As long as you have verifiable income, you can get a good loan interest rate. The lender will want to see your current income to ensure that you can afford the monthly loan payments.

Note that if you’re borrowing from a licensed lender, the amount you can borrow will depend on your monthly income. For instance, if you have an income of at least S$20,000, you can borrow up to 6x your monthly salary.

Consolidate Your Debt

Having multiple existing loans will make banks hesitant to approve your loan application. Paying off two or more loans simultaneously can lead to further financial strains. As such, the banks may offer a higher interest rate than usual to protect you and themselves.

To get a low interest rate, it’s best to first pay off your existing obligations. Consolidating your debt will also help improve your credit score.

Have a Good Relationship With Your Bank

It isn’t surprising that a long-standing customer of a bank will have a higher chance of getting the best loan interest rate. Banks ultimately want to have a good working relationship with their clients. That said, if you are a loyal customer of your bank, consider taking out a loan with them first. Ask for a quote and compare the rates and terms with other lenders.

types of loan available illustration

Good To Know/Refresher

Types of Loans

There are different types of loans in Singapore. These are the most common loans available:

  • Personal Loans: This type of loan is very flexible since it can be used for anything you might need – whether it’s for a medical emergency, home renovation, or wedding. This loan has a fixed interest rate and repayment terms.
  • Payday Loans: This is a short-term loan that will help ease your financial problems immediately. This is ideal if you need emergency cash or pay-off obligations that are due. However, it needs to be paid on the next payday.
  • Car Loans: These loans are intended to help borrowers purchase a vehicle. Auto loans also help businesses finance their purchase of commercial vehicles, such as vans and heavy autos.
  • Business Loans: There are a plethora of business loans available in Singapore. For instance, SME loans are perfect for business owners who need a boost in their working capital to fund their business needs.
  • Bridging Loans: These loans are short-term loans and are perfect for homeowners who need extra cash to fund their next home purchase as they wait for their old property to sell.
  • Home Loans: A home loan is also known as a mortgage loan. It is money borrowed from HDB, banks, or licensed moneylenders so you can buy a property.

Secured vs. Unsecured Loans

  • Secured Loans: Secured loans are the type of loans that require the borrower to put up an asset as collateral, such as a house or car. This type of loan is riskier since you could lose the asset if you fail to pay back the loan. However, since the lender is taking less risk, these loans tend to have lower interest rates. Auto loans and home equity loans are secured loans.
  • Unsecured Loans: This type of loan does not require collateral. As such, it is a safer option for borrowers, especially if you have a good credit score. This is because you’ll be able to qualify for a good interest rate.

Unsecured loans typically have more stringent eligibility requirements, lower borrowing limits, and higher interest rates. A personal loan and a payday loan are a type of unsecured loans.

What is the Difference Between Advertised Interest Rate and Effective Interest?

If you are shopping around for the best personal loan, you may have encountered two different interest rates – the Advertised Flat Rate and the Effective Interest Rate.

  • Annual Interest Rate: This is the advertised rate by the bank. This is the rate that the bank or lender charges on your principal until you pay back the money owed. For example, if you borrow S$10,000 at 6% for 1 year, you’ll have to pay S$50 in interest per month. The annual interest rate will decide how much you’ll have to pay the bank every month.
  • Effective Interest Rate (EIR): The EIR represents the “true” cost of the personal loan, including processing fees. That said, the EIR is usually higher than the annual interest rate.

If you are borrowing from a licensed moneylender in Singapore, you don’t have to worry about the effective interest rate. According to the Ministry of Law’s website, the maximum interest rate that licensed lenders can charge is 4% per month. This cap applies regardless of your income and whether the loan is unsecured or secured.

Loan Basics

  • Principal: This is the total amount of money you borrowed from the bank or licensed lender. Typically, you will receive a lump sum and then start paying back the loan on a monthly basis.
  • Interest: The interest is the total cost of the loan. It is typically expressed as Annual Percentage Rate (APR) and may include additional fees charged by the lender.
  • Loan Term: This is the amount of time that you have to repay the loan. The longer the loan term, the lower your monthly repayments but incur higher overall interest. 

Closing

Before you start shopping for the best personal loans, you must first understand your monthly payment responsibilities. Aside from the loan amount, you must also pay interest as well as other fees associated with the loan. If traditional banks are not an option, taking out a personal loan from licensed moneylenders is a viable option.

Key takeaways:

  • Compare the best deals and loan terms before committing to any loan plan.
  • If you’re in the market for a personal loan, make sure to improve your credit score first so you can avail the best interest rates.
  • Use an online loan calculator to help you work out your monthly payments. Doing so will help you determine whether you can afford the loan or not.

Overcome financial obstacles with the help of a trustworthy and reliable licensed moneylender. A1 Credit has been in the money lending industry since 2009 and has since provided its clients with flexible and affordable loans. Offering simple applications and tailored packages, you can borrow quickly and confidently! Request a free quote today.

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