Any credible financial institution makes the overall cost of borrowing explicit. Naturally, this is not a free service, otherwise, lending would not exist. The interest and all the charges added must be clearly spelled out in the agreement. In essence, this is the price a client pays.
Price of the service
Some legal money lenders Singapore charge more, others less, but the interest in general largely depends on your individual case. If your prior relationship with credit has been turbulent, new loans could be pricier. For the sake of clarity, we’ll make calculations based on the average rate of 12% annually (common for Singapore).
Normally, this is the format you will see in your contract. APR, or annual percentage rate, tells you how much it costs to borrow the specified sum for 12 months. Thus, if your term is merely half a year, you should only pay half of it. The indicator is universal, and it is therefore used for convenience.
The amount lent
The lump-sum you receive constitutes the principal (P). Like interest (I), it is one of the factors defining the cost. Do not be overly optimistic in the assessment of your needs and ability to pay back.
Never borrow more than you can afford to — this is the golden rule. But how should one actually determine their largest acceptable amount? Read on to discover several crucial considerations that ensure your calculations are right.
By way of example, let’s see how much it costs to get $15,000 for three years (36 months). With the mentioned I, you would need to repay $498 monthly. This fixed payment comprises a portion of your P and the I accumulated over a month.
A typical personal loan belongs to the so-called amortizing category. This means the portion of P owed gradually shrinks to zero as the loan reaches maturity. It is also more complicated than simply calculating annual I on the amount you borrowed. This way, you will see a misleading result higher than the truth.
Consider the same example of a twelve-month arrangement for $15,000 with 12 percent p.a. With every passing month, the cost of borrowing declines. So, for the first one, the formula is:
1. 12 percent divided by 12 (payments) = 1 percent of monthly I.
2. This figure should now be multiplied by the P. What you see is I included in the first monthly payment.
To continue calculations for subsequent months, do the following.
- Subtract the result of the above-mentioned procedures from the total amount of fixed monthly repayment. This way, you see how much of P you will have returned with your very first repayment.
- Subtract it from P to see how much of it you still owe.
- Repeat steps 1-2 for each subsequent payment.
Most websites have embedded tools that allow you to compute provisional indicators for typical interest rates. These aids are extremely useful for making comparisons between providers and offers.