The cost of your loan depends on a variety of factors that include: your annual income, how much you want to borrow (i.e. principal) and the duration of your loan (also called tenure). This information is meant to help lenders measure the risk that they are taking by providing a loan to an individual. Hence, it will also impact the cost of the loan that you receive. In general, the less risky a loan, the lower the interest rate, and cheaper it will be for the borrower. Let’s take a look at how each of the three variables impact your borrowing cost.

## Average Interest Rates of Personal Loans

While interest rates do vary from lender to lender, we have put together a summary chart here to provide a general overview of how much personal loans can cost. For calculations, we assume that you are making somewhere between S$30,000 and S$40,000 annually, and are taking out a personal loan of S$10,000.

It is important to note the difference between annual flat rate and effective interest rate. Annual flat rate is simple. Banks simply charge a flat rate of around 7% on your principal for every year of your loan's duration. If you borrowed S$50,000 at 7% for 3 years, for example, then you will have to pay an interest of S$3,500 every year. Your monthly payment, then, will be divided into equal parts of S$1,681 that include S$292 of interest payment (S$3,500 divdied by 12) and S$1,389 of principal (S$50,000 divided by 36 months).

On the other hand, effective interest rate is more difficult to understand. But this is the true cost of holding a personal loan. Because you are paying your loan back over a period of time, you don't have full access to the money you borrowed for the whole time. Therefore, effective interest rate adjusts for this factor to get to the true cost of a loan. On average, effective interest rate for personal loans in Singapore ranges from 13% to 15%, though some of the best personal loans in Singapore offer effective interest rates around 10%.

Tenure | Estimated Annual Flat Rate | Estimated Effective Interest Rate |
---|---|---|

1 Year | 6.99% | 15.15% |

2 Years | 6.93% | 14.15% |

3 Years | 6.65% | 13.10% |

4 Years | 6.84% | 13.11% |

5 Years | 6.79% | 12.75% |

#### Impact of Your Annual Income

The conventional thinking is that people with higher income are more able to pay off their debt than people with lower income. Banks believe this as well, and price loans to individuals accordingly. As we mentioned in the Basic Guide to Personal Loans, most banks require a minimum annual income of S$30,000 to qualify for a personal loan, although there are some products designed for people who make as little as $20,000 per year.

Generally, personal loans with higher annual income requirements offer cheaper interest rates given the lower risk profile of the borrower. While our average personal loan interest rate table above shows annual flat rates around 7%, this rate could jump to 11%-13% for borrowers who make less than S$30,000 (which translates to 20% to 27% of effective interest rate).

#### Impact of the Amount You Want to Borrow: Principal

The total amount of money you want to borrow, otherwise called principal, also has an effect on the cost of your personal loan. Typically, bigger loans are only available for people with higher income, and that means that bigger principal amount also tends to come with lower interest rate. Typically, most banks will not make a personal loan below the amount of S$1,000 to $5,000. The maximum amount typically ranges from 4 times to 6 times your monthly income, though some banks do go up as high as 8 times.

#### Impact of the Duration of Your Loan: Tenor

The last rule of thumb in thinking about cost of loan is that longer the duration of the loan, the lower the annual interest rate but higher the total cost. From a bank’s point of view, they want to make a certain amount of profit on the loans they make. If a loan’s duration is long (say 5 years), they have 5 years to collect the loan and interest from the borrower. This means that the bank will be collecting more dollars from the borrower in the form of interest payment. For instance, if you borrow $10,000 at 5% flat annual interest rate over 5 years, you have to pay an interest of S$2,500 over 5 years (10,000 x 5% x 5 years).

Because of this dynamic, banks tend to be more generous with the interest rates offered on a longer term loan. Therefore, our table for Average Cost of Personal Loans shows the interest rate declining for longer term loans.

This dynamic creates a dilemma for some borrowers. You have to think for a bit before deciding what kind of tenor you want on your personal loan. On one hand, you want to pay as little as possible in interest. On the other hand, you may want a lower monthly payment that is more easily manageable. Our recommendation is to get as short of a duration as possible while keeping monthly payment to a level that you can easily manage. This will help you find the right balance of keeping the overall cost of loan down while not straining your personal finances.

Lastly, most banks make personal loans that last 1 to 5 years. Some banks make longer loans up to 7 years.

#### Processing Fee

Most banks charge a processing fee. This is supposed to cover the expense of processing your loan applications & getting the necessary materials (like your credit report) to approve your loan. It typically ranges from 2% to 3% of your principal, or sometimes a fixed amount of S$80 to S$200 is charged no matter how much you borrow.

For smaller loans, it makes more sense to go with a 2-3% processing fee than a fixed sum of S$80-200. Take an example of a person taking out a personal loan of S$1,000. If he pays a 2% processing fee, that amounts to S$20, while even a S$80 fixed processing fee will shave S$80 off of his principal. As a rule of thumb, we recommend going with 2-3% processing fee for principal amounts below S$2,600.

On the other hand, larger loan amounts would be more appropriate for fixed processing fees. If you take out a loan of S$20,000, even a 2% fee would be S$400, way more than the highest fixed fees we’ve seen at S$200. Generally, it is preferable to choose the fixed fee version for bigger loans of S$4,000 or more. Just make sure to calculate what you end up paying in terms of dollar amount before choosing which loan to choose.

#### Early & Late Payment Penalty Fees

Understandably, banks do not like it when you pay your monthly payments late. Late payments signal to the bank that the borrower is at risk of defaulting on the loan, which will result in a loss for the lender. To incentivize borrowers to pay on time, therefore, banks instituted what is called a late payment penalty. When you are late in your monthly payment, banks charge somewhere around 25% (or whatever the prevailing interest rate is at the time) on the overdue amount, and also adds another penalty fee of 2.5% or S$60-100 on top of that. This could balloon quickly if you don’t pay them off quickly, so we really recommend you to pay off your debt on time always.

Another penalty is called early repayment (or prepayment) penalty. When you pay off your debt earlier than the bank expects, the lender ends up making less on interest than they initially expected when they made the loan. To make up for the difference, they charge a prepayment penalty. This can range from 2.5% to 3% of redemption amount, or sometimes can come in a form of fixed fee ranging from S$100 to $250. Given this, it is very important to carefully consider the duration of the loan you need right off the bat and stick to the scheduled payments.

## Total Cost of Personal Loans & Monthly Installment

To sum it up, the total cost of your personal loan is the dollar amount in interest and processing fee you end up paying over the course of your loan’s tenure. As long as you don’t make late or early payments, this is going to be the amount you end up paying to the lender in exchange for borrowing the money.

In order to calculate how much you need to pay back to the lender on a monthly basis, first multiply your annual flat rate by the principal amount. Then, multiply this amount by the duration of your loan in years. Then add this amount to the principal you borrowed. Dividing this by the duration of your loan in months will result in the monthly payment (also called monthly installment) that you need to make to the bank.

These two numbers are the most important factors you want to focus on before submitting an application for personal loan. You want to minimize the total cost of your personal loan, while making sure that your finances can comfortably handle the monthly installment required to pay off the loan.