You will be able to read a personal loan offer and find its EIR, fees and total repayment.
Aisha is 32 and teaches at a primary school in Sengkang. Her father needs dental work that his insurance will not cover, and she has offered to pay the S$10,000 bill and be repaid slowly by her siblings. Her bank's app shows a pre-approved personal loan with a banner rate of 3.5% a year. Three taps and the money would be in her account tonight.
She hasn't tapped yet, and that pause is the subject of this module. Module 3 compares the three common ways to borrow a lump sum: a personal instalment loan, a credit line and a balance transfer. This lesson starts with the most familiar of the three, and with how to read its offer before you accept it.
A personal instalment loan gives you a lump sum upfront, which you repay in equal monthly amounts over a fixed term, often between one and five years. The instalment never changes, and when the last one is paid the loan is gone. There is nothing to manage and no temptation to borrow more from the same facility, because there is no limit to draw on again.
That predictability is the main reason people choose it. You know on day one exactly what each month costs and exactly when it ends. It is also unsecured, like a card, so the lender charges for the risk, though usually much less than card interest.
Personal instalment loans in Singapore are usually advertised on a flat rate. You met the flat rate in How money works: banks, interest, inflation and risk, in lesson 3.2, Why a flat rate loan costs nearly double what it looks like. The interest is worked out once, on the full amount, for every year of the term, even though you owe less each month as you repay.
Here is Aisha's offer with example figures. The loan is S$10,000 at 3.5% flat over three years. Interest is S$10,000 times 3.5% times 3, which is S$1,050. She repays S$11,050 over 36 months, so each instalment is S$11,050 divided by 36, about S$306.94.
The figure to compare is the effective interest rate, or EIR. It is the yearly rate charged only on what you still owe that would produce the same payments. For Aisha's loan, the EIR works out at about 6.6% a year, using the RATE function method from lesson 3.4 of How money works, Calculate the EIR of a flat rate offer with the RATE function. The 3.5% on the banner and the 6.6% describe the same loan. Only the second one can be compared fairly with a credit line, a balance transfer or another bank's loan.
Lenders in Singapore usually show the EIR somewhere in the offer, often in smaller type below the flat rate. If it is not there, ask for it, or work it out yourself from the instalment, the term and the amount you receive.
Two charges change what an instalment loan really costs, and both are in the terms.
The first is a processing fee, charged when the loan is set up. It may be a percentage of the loan or a fixed sum, and it is often deducted from the money you receive. If Aisha's loan carried an example processing fee of S$100 taken off the top, she would receive S$9,900 but still repay S$11,050. Her cost of borrowing rises from S$1,050 to S$1,150, and the EIR rises from about 6.6% to about 7.3%. The fee is small next to the loan, but it is paid on less money over the same term, which is why the rate moves.
The second is an early repayment charge. Because the lender has already counted on three years of flat interest, paying the loan off early often triggers a fee, and you may not get back all the interest you expected to save. If there is any chance 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 and, on top of that, interest on overdue instalments. Those only bite if you miss a payment, but read them anyway.
Rates and fees are inputs. The figure that tells you what the loan does to your finances is the total amount you will repay, compared with the cash you receive. For Aisha's example, that is S$11,050 repaid for S$10,000 received with no fee, or S$11,050 repaid for S$9,900 received with the S$100 fee.
The maths of flat rates and EIR is taught in full in How money works. This course uses it rather than repeating it. If the RATE function is new to you, go back to that lesson before lesson 3.4 of this module, where you will need it again.
Aisha now knows the four things to look for on her bank's offer screen, all in figures she can find without asking anyone: the flat rate, the EIR, the fees, and the total she would repay. 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 and write down the flat rate, the EIR, the fees and the total amount you would repay.
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