When you take up a loan, it can be a secured or unsecured loan. A secured loan is when a borrower pledge his assets as a collateral for the loan, such that the lender has a kind of security/guarantee against the money he lent. On the other hand, taking an unsecured loan does not require any guarantee, but typically comes with a higher interest rate because of the risks the lender is taking.
Some examples of secured loans include car loan and mortgage loans, whereas an unsecured loan includes personal loans, study loans and credit cards.
While most borrowers typically look out for a loan that charges a lower interest rate, there can be other factors that you should consider as well. This includes the eligibility criteria, fees and charges additional to the loan, minimum loan tenor and prepayment penalties.
Understanding Interest Rates
Interest rates can be confusing because what’s advertised may not be the actual amount you are paying. One tip for borrowers is to always look out for the effective interest rate.
The Effective Interest Rate takes into account the compounding effect of the frequency of instalments. The more compounding periods there are, the higher the interest.
Licensed Moneylenders’ Interest Rates
In 2015, the interest rates that legal moneylenders can charge has been standardised. This is to prevent moneylenders from abusing their power and charging high interest rates on borrowers which can be difficult to pay off.
The maximum interest rate moneylenders can charge is 4% per month. If the borrower does not make prompt repayments, the maximum rate of late interest a moneylender can charge is 4% per month for each month the loan is repaid late.Do note that banks typically charge their loans by an annual rate instead of a monthly rate.
Interest rates of Unsecured loans in Singapore
Are you looking for your various borrowing options? Here is a table for the range of interest rates for unsecured loans in Singapore:
|Type of Loan||Tenor||Interest Rates||Conditions|
|Study Loan||5 to 8 years||4.5 – 6% p.a.||Requires guarantor with minimum income qualification. May only be allowed for certain schools.|
|Renovation Loan||1 to 5 years||5.5 to 8% p.a.||Minimum loan size, cancellation fee, pre-payment penalties, minimum income qualification, credit checks|
|Personal Loan from Banks||1 to 5 years||9 to 14% (EIR)||Minimum loan size, minimum loan tenor, minimum annual income of $30,000, credit history checks.|
|Personal loan from licensed moneylender||Flexible||4% per month||Loan cap based on qualifying income, credit checks in Moneylender’s credit bureau, expensive late fees.|
|Credit Cards||Revolving credit||24-26% p.a.||Minimum qualifying income, high late payment fees, credit history checks, minimum monthly payment to be met.|
As you can see from the table, loans that are more specific are typically cheaper than general loans which disburse a lumpsum for you to use as you like. Thus, it may be worthwhile to take up a more specific loan to save on interest costs if it suits your purpose.
Since loans are not cheap and the cost can add up when compounded, it makes sense to be sure about how much you are charged. Ask for all the details before you sign on the dotted line and be sure to work out whether you can afford the monthly repayments. Paying only the minimum amount each month can snowball your debt into something so huge that can make it hard to pay off. Think twice before you borrow and always be financially-prudent!
Always bot you find that you cannot stop yourself from swiping your card, it’s better to cancel it!