Read a personal loan offer and pick out its EIR, its fees and the total you would repay.
When you need a lump sum quickly, for a medical bill, a repair or a family emergency, the offer is often already waiting in your bank app. It shows one rate in large type and a button to accept. That rate on its own does not tell you what the loan will cost. The figures that do are usually on the same screen, in smaller print.
Module 3 compares three common ways to borrow a lump sum: a personal instalment loan, a credit line and a balance transfer. The personal instalment loan, the most familiar of the three, comes first.
A personal instalment loan pays you a lump sum upfront. You repay it in equal monthly amounts over a fixed term, typically between one and five years. The instalment never changes, and when the last one is paid, the loan is finished. There is nothing to manage, and because there is no limit to draw on again, there is no temptation to borrow more from the same facility.
Predictability is the main reason people choose it. From day one you know what each month costs and when the payments end. The loan is unsecured, like a credit card, so the lender charges for the risk, though usually much less than card interest.
Aisha is 32 and teaches at a primary school in Sengkang. Her father needs dental work his insurance will not cover, and she has offered to pay the S$10,000 bill and let her siblings repay her slowly. Her bank app shows a pre-approved personal loan with a banner rate of 3.5% a year, an example figure like all the loan figures here. Three taps would put the money in her account that night. She has paused and not accepted yet, and that pause is the subject of Module 3.
In Singapore, personal instalment loans are usually advertised on a flat rate. Interest is calculated once, on the full amount, for every year of the term, even though the balance you owe falls each month as you repay. You first met the flat rate in How money works: banks, interest, inflation and risk, lesson 3.2, "Why a flat rate loan costs nearly double what it looks like".
For Aisha's offer of S$10,000 at 3.5% flat over three years, the interest is S$10,000 x 3.5% x 3 = S$1,050. She repays S$11,050 over 36 months, so each instalment is S$11,050 / 36 = about S$306.94.
The effective interest rate (EIR) is the yearly rate, charged only on what you still owe, that would produce the same payments. For Aisha's loan the EIR is about 6.6% a year, worked out with the method in How money works, lesson 3.4, "Calculate the EIR of a flat rate offer with the RATE function". If the RATE function is new to you, go back to that lesson. You will need it again in lesson 3.4 of this module, so review it before you get there. How money works teaches the maths of flat rates and EIR in full, and this course uses that maths without repeating it.
The banner 3.5% and the 6.6% EIR describe the same loan. Only the EIR can be compared fairly with a credit line, a balance transfer or another bank's loan. Singapore lenders usually show the EIR somewhere in the offer, often in smaller type below the flat rate. If it is not shown, ask for it, or work it out yourself from the instalment, the term and the amount you actually receive.
Two charges in the terms change what the loan costs: the processing fee and the early repayment charge.
The processing fee is usually charged upfront, when the loan is approved, according to MoneySense. How the fee is set, and whether it comes out of the money you receive, varies, so check those details on each bank's fee schedule. Say Aisha's offer carries a S$100 processing fee taken upfront. She receives S$9,900 but still repays S$11,050, so her cost of borrowing rises from S$1,050 to S$1,150. The EIR rises from about 6.6% to about 7.3%, because she makes the same repayments on less money over the same term.
The early repayment charge is a fee for paying the loan off before the end of the term. The lender has already counted on the full term of flat interest, so paying early often triggers this fee, and you may not get back all the interest you expected to save. If Aisha's siblings repay her quickly and she wants to clear the loan early, this charge matters as much as the rate.
Some offers also carry late payment fees plus interest on overdue instalments. These apply only if you miss a payment, but read them anyway so you know what they are.
The rates and fees are inputs. The figure that shows what the loan does to your finances is the total you repay compared with the cash you receive. With no fee, Aisha repays S$11,050 for S$10,000 received. With the S$100 fee, she repays S$11,050 for S$9,900 received.
All four figures are on the offer screen, and you can find them without asking anyone:
the flat rate, which is the banner rate the EIR, usually in smaller type below the flat rate, or calculated from the instalment, the term and the amount received using the RATE function the fees: the processing fee and whether it comes out of the payout, the early repayment charge, and any late payment fees and interest on overdue instalments the total you will repay, set against the cash you actually receive
Aisha now knows the four things to look for on the offer screen before she taps accept: the flat rate, the EIR, the fees and the total repaid. A real personal loan offer from any bank's website, with those four written beside it, is the starting point for everything else in this module.
Find one personal loan offer. Write down its flat rate, its EIR, its fees and the total amount you would repay.
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