A personal loan is dedicated to customers who are experiencing economic turmoil. Customers can have their personal loans from banks to finance their needs. Examples are house renovation, education, card repayment, property mortgage, and other financial needs. Successful loan applicants can enjoy flexible loans with affordable fees.
Interest refers to the cost of using the money of the lending company. Whenever you borrow money, you will have to pay the interest. Meanwhile, when you lend money, you will have to earn interest.
Indeed, there are different ways to calculate interest and some ways can be beneficial for the lenders. The decision to pay interest will depend upon what will you get in return. The decision to earn the interest will depend on the options available for you to invest your money.
Interest
Interest refers to the percentage of a loan or deposit balance. It is paid to the lender periodically for using their money. The loaned amount can be quoted as an annual rate. However, personal loan interest rates can be calculated for periods that can be shorter or longer than a year.
Paying Interest
Whenever you borrow money, you will have to pay interest. Interests can be paid on an installment debt. The interest rates on loans like auto, student, and standard home loans can be included in the monthly repayments. A portion of your payment each month will go toward reducing your debt. However, the other portion is your interest cost. With these loans, you can pay your debt for a period.
Meanwhile, other loans are called as revolving loans. Meaning, you can borrow the money month after month and have periodic payments. For example, credit cards will allow you to repeatedly spend so long as you are staying below your credit limit. Meanwhile, interest calculations may vary. However, it is not hard to figure out how payments work and how interest is charged.
The loaned amount is quoted with the annual percentage rate (APR). This figure will tell you how much you must pay per year. This can also include additional costs that are beyond the interest charges. In other loans, you will be paying the finance costs or the closing costs. No interest costs will come around from the amount of your interest rate and loan. Thus, it will be useful to find out the difference between an APR and interest rate.
Effective Interest Rate (EIR)
The personal loan interest rates of the business loan are usually quoted in Effective Interest Rate (EIR). It refers to the actual cost of borrowing. It is usually amortized on a monthly reducing principal balance basis. As such, the original loan amount is reduced with the monthly installments paid. For the initial periods of the loan tenure, a big portion of the monthly installment payments will be used towards the servicing interest portion of the loan.
The majority of the small and medium enterprises (SMEs) will usually mistake the calculations of EIR. When you quote 10% p.a. EIR interest for the amount of $100,000, the majority will derive the interest per year which is at $10,000. However, the actual interest annually is only $5,499. This is the reason why it is common to be quoted as the nominal rate for business loan products to simplify the mathematical equation.
With the same example, the nominal interest rate for the 10% p.a. EIR is 5.5% p.a. flat rate. In sum, the better your company’s cash flow financial figure and credit profile, the lower the interest rate that you might be eligible.
Indeed, other factors can influence your eligible interest rate. This will include the number of years in the business registered, the nature of the banks, and the personal credit profile of the director.
Effective vs Flat Interest Rate
Effective interest rates will take into consideration the reducing periods or the compounding periods during the repayment schedule. Meanwhile, flat rate or also called as a simple or nominal rate will factor the original principal factor. It will disregard the effects of compounding on a loan.
Banks with the Lowest Interest Rate
Indeed, each bank might have different interest rates. However, many factors will influence the rate quotes. This will include the credit profile of the borrower, the size of the loan quantum, and the industrial nature. As such, two different companies might have different rates coming from the same bank.
SME loan interest rates
The interest rates of the unsecured term loan are typically fixed. These are not subjected to changes throughout the repayment period. For revolving facilities like trade financing or overdraft, the interest rates might be subject to revision per year, depending on the prevailing rates.
In Singapore, the business loan interest rate ranges from between 7% to 13% p.a. effective rate. Remember, every bank has its own interest rates and terms.
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