What to know about interest rates

What is interest rate?

Interest rates are amounts charged from borrowers on an asset by the loan provider. Measured annually, interest rates are often referred to as APR or Annual Percentage Rates, and are usually a percentage of the principal sum. Consumer goods, major assets like cars, property etc. and physical cash, are assets that can be borrowed.

Essentially, interests are the charges collected for the use of an asset from a borrower. Lease rate is used to term interest rate charged on large assets like cars or landed property. Depending on the risk, the interest rate charge differs. Low-risk borrowers are often charged low-interest rates, and high-risk borrowers, in turn, are charged high-interest rates.

Interest rates on borrowed money are linked with the amount being lent or the principal. Here, interest rate refers to what the debt is worth for the borrower and the loan provider's return rate.

When is interest rate normally applicable?

Lending and borrowing being the world of finance, there are a variety of cases where interest rates are applicable; from borrowing money to kickoff major projects, to school and medical fee payments, acquiring a new home, opening a business and a host of others. Funding of capital projects and expansion of business operations require certain businesses to obtain loans so as to purchase fixed or long-term assets such as heavy machinery, landed property, etc. Repayment of the funds lent are usually done in instalments every month, or paid as lump sums or at pre-designated dates.

Example

The repaid money is often much higher than the original loan, as banks feel the need to be indemnified for being unable to use the money during the period it was given out, and the possibility of having it invested elsewhere instead of lending it out. Banks giving out large assets believe they would have been able to realise proceeds if they had made use of the assets themselves instead of having them loaned. The Interest charged makes the difference between the total sum to be repaid and the initial loan acquired.

For example, if a bank lends a borrower S$200,000 with a fixed interest rate at 15%, this implies that the borrower pays back the original amount of S$200,000 with an addition of S$30,000 (15% x S$200,000), equaling S$230,000.

Simple interest rate

Below is the simple interest formula used to derive the scenario above:

Principal x interest rate x time = simple interest

Thus, a payment of S$30,000 will be paid by the borrower as interest, if the agreement was for only a year. However, if the agreement was stated to last 10 years, the interest rate payment will be calculated as follows:

Simple interest = S$200,000 x 15% x 10 = S$300,000

With an annual interest rate of 15%, a payment of S$30,000 will be expected of the borrower yearly. Hence, a borrower will be made to forward an interest payment of S$300,000 after 10 years, working with a similar interest rate.

Compound interest rate

Rather than the simple interest, most banks now employ the compound interest method or the interest on interest method, as it is fondly called. This method is applied to both the principal and the interest, accumulated from previous periods. It is assumed by the bank that at the end of the first year, the borrower owes both the principal and interest of that year combined. Also, at the end of the second year, the bank assumes that the borrower pays the principal, the previous year’s interest, plus the previous year’s interest on interest.

Unlike the simple interest rate, interest owed in the compound interest method is considered, because they have been charged monthly and accumulated from previous months.

To calculate the compound interest, we employ the following formula:

Compound interests = principal sum x [(1 + interest rate)n-1] where n stands for the number of periods compounded.

Personal loan with low interest rate

The easiest and most efficient way of finding a personal loan with low interest rate is to follow a couple of steps before, during and after the loan application. The more meticulous you are, the higher the chance of finding a personal loan with the lowest possible interest rate.

1. How much do you need to borrow?

Make sure that you apply for an amount that is not only suitable for your needs, but that is also optimising you chances of getting a low interest rate on your loan. If your financial situation is stable, you are likely eligible for a higher loan amount with a longer loan tenure. A longer loan tenures normally equals a lower monthly interest rate.

2. Are you eligible to get a loan?

Every bank and financial institution operates by their own eligibility criteria which are based on the internal processes and requirements, as well as your credit score. At Lendela, where you get access to multiple banks and financial institutions via just one application, the requirements to apply for a personal loan with low interest rate are:

Age criterion
A minimum of 21 years to a maximum of 61 years (consequent to the expiration of the tenure) is the acceptable age range.

Income criterion
You must earn at least S$1,600 a month to apply for a loan.

Nationality and employment criterion
You must be a salaried Singaporean, Permanent Resident or Employment Pass holder in order to apply.

3. Apply with multiple banks and financial institutions

In order to be sure that you are actually going to get the lowest possible interest rate, you simply have to apply to more than just one or two loan providers. Doing this by yourself can be a very tiring and time consuming process where you as an applicant will have to submit separate applications to each bank. Most of the time, these application forms are not fully available online and differ depending on which financial institution or bank you are applying with.

So, what is the solution then?

It is actually very simple. By submitting just one application at Lendela, you automatically ensure that it gets sent to multiple banks and financial institutions – that is just how the Lendela model works. The process also creates a situation where each loan provider will come back with their absolute lowest interest rate offer in order to attract your interest.

4. Compare interest rates

Interest rates, instalment structures and repayment plans sometimes vary a lot depending on the loan provider. Therefore, it can be difficult to understand the difference between one loan offer and another. With Lendela, you will get all your offers presented to you in a simple, transparent and comprehensive way. It all happens online on your account and Lendela's Customer Relationship Team is always available to support you if you have any questions regarding the offers. When your interest rate comparison is done, all you have to do is select the best offer.

Do you want to find out what is your best possible interest rate? It is easy with Lendela. Apply for free and get loan offers from various banks and financial institutions. Compare the interest rates and select the best option online. Simple, right? Of course, your offers come without any obligations.