How to Calculate Interest Rates for your Loan

Almost every loan around the world comes with interest of some form. Interest is a fee that is charged by a licensed money lender for allowing you to loan a stipulated amount of funds. Some loan lenders charge exorbitant fees, so it is vital that you try to find authorised money lenders in Singapore to prevent this from happening. If you’re unfamiliar with calculating your interest rates and finding out just how much they’ll cost you in total, here’s a simple guide to figuring that out!

Why Do People Take Out Loans?

People often take out loans for significant purchases such as cars, property or if you find yourself in an emergency where you need extra funds. It should also be understood that loans will have different terms and repayment periods.

What’s the Difference Between Annual Flat Rate and Effective Interest Rate?

Annual Flat Rate

Annual flat rates loans are quite easy to calculate as each year the bank will charge you a flat rate of X% p.a. on the principal until the loan is fully repaid. For example, if you were to borrow $5,000 for one year at an interest rate of 6%, you would have to pay $33 in interest each month on top of the principal amount making the total monthly repayment S450 per month. The total interest payable would be $400.

It is therefore essential that you can afford the monthly payments. Reliable money lenders in Singapore will always ensure this.

Effective Interest Rate

The effective interest rate is what shows the real economic cost of a loan which means that it is quite complicated to understand. The best money lenders in Singapore will take the time to ensure precisely what it entails. The majority of personal loans in Singapore have an upfront fee of up to 10%, which will be deducted from your loan at the start.

For example:

ˆAIR: Applied Interest Rate

*EIR: Effective Interest Rate – inclusive of 3% (for AIR: 7.99%p.a.) or 2% (for AIR: 5.88%) or 4% processing fee (for AIR 11%)

As you can see, the EIR is far higher than the advertised rate, but the processing fee is far from the only causing the EIR to be higher. The duration of the loan will also affect the amount that you repay. Each month you are making a monthly repayment, but this does not reduce the amount of interest that you are paying.

Credit cards do not operate in the same way. If you pay your card each month, you will not pay any interest despite the 25% interest rate applicable.

The Calculation

The first step is to calculate the balance of the loan. Approximately half of your loan repayment will be the principal. So, if a loan was for $5,000, this will be $2,500. The interest calculation is:

Principal x Flat Interest Rate x Loan Tenor

In Singapore, the average interest is 7% so continuing with our example of a loan of $5,000 for a period of three years, the total cost would be $1,050, but with a 3% process fee, this would make $1,200. So, the actual amount payable is shown below:

Principal: $5,000

Duration: 3 Years

Annual Flat Rate: 7%

Flat Rate: 3%


Average Principal: $2,500

Interest Payment: $1,050

Fee: $150

Total Cost: $1,200

Effective Interest Rate: 16%

Lowest Interest Rate Loans

You can’t begin to figure out which loan has the lowest interest rates when you don’t know how to begin calculating how much you’re actually being charged. So we hope this little guide has been helpful for you! If you have any questions about getting private loans in Singapore, or about our attractive interest rates, call us now at (+65) 62244746 (Yishun) and (+65) 62244749 (Tampines).