Include processing fees, admin charges and early repayment penalties when you compare two loans.
Two banks offer you the same S$10,000 personal loan over five years at 3% flat, with the same monthly instalment of S$191.67 (all figures here are made-up examples). You pick the bank whose app you already have, and a week later S$9,500 arrives in your account, not S$10,000.
The missing S$500 was a processing fee taken off the top, and it was stated in the terms all along. The headline rate tells you how interest is charged. It tells you nothing about the loan's other costs.
A processing fee is a one-off charge for setting up the loan. Lenders collect it in one of two ways: they deduct it from the money paid out to you, or they add it to the amount you owe. Either way, you repay more for every dollar of cash you actually get to use.
When the fee is deducted, as in your case, you still repay the full instalments. S$191.67 a month for 60 months comes to S$11,500. You pay interest on the full S$10,000 while only having S$9,500 to use.
To measure this, work out the real cost of borrowing, which is the total you repay minus the cash you actually received. Without the fee, that is S$11,500 minus S$10,000, or S$1,500. With the fee, it is S$11,500 minus S$9,500, or S$2,000.
The fee also pushes up the EIR, while the advertised flat rate stays at 3% throughout. In Lesson 3.2, "Why a flat rate loan costs nearly double what it looks like", you saw that the no-fee version of this loan has an EIR of about 5.6%. Set the same payments against S$9,500 instead of S$10,000 and the EIR rises to about 7.8%. A smaller fee of S$200 would give an EIR of about 6.5%.
Side by side, the two offers that looked identical are quite different. Bank one charges no fee: you receive S$10,000, repay S$11,500, and the EIR is about 5.6%. Bank two charges S$500: you receive S$9,500, repay the same S$11,500, and the EIR is about 7.8%. Both are advertised at 3% flat.
Lenders in Singapore usually state an EIR on the offer, and that is the figure to read rather than the flat rate. When the EIR includes a processing fee taken from the loan, it folds the most common difference between two offers into one number. If you are not sure whether the EIR on an offer includes the processing fee, ask the lender before you sign.
Do not compare loans on the monthly instalment, because a lender can always make the instalment smaller by stretching the term. Take the same S$10,000 at 3% flat with no fee. Over five years you pay about S$191.67 a month, S$11,500 in total. Over seven years the instalment drops to about S$144.05, but 84 payments come to S$12,100, which is S$600 more than the five-year loan.
Whether you can afford the instalment is a fair question, and you should check it separately. The choice between two loans should be made on the EIR and the total amount repaid.
Some costs only arise if your plans change, so they are easy to overlook at signing. The two that matter most are early repayment charges and late payment charges.
Early repayment charges apply if you pay off the loan before the term ends, for example when a bonus arrives or you want to clear the debt before a big purchase. Some loans charge a fee for this. On flat rate loans, the terms also set out how much of the remaining interest you still owe when you settle early. Read this clause to see what you would owe, because it decides whether paying early saves you any money.
Late payment charges apply if an instalment is missed or paid late. Usually this is a fee, and sometimes there is extra interest on the overdue amount as well. If your income varies, or you are keeping track of several due dates, give the late payment clause as much attention as the rate.
Neither charge appears in the headline rate. In most cases the EIR leaves them out too, because it assumes every instalment is paid on time until the last one. When you compare two loans, write these charges down next to the EIR for each, so that a loan that is cheap only if nothing goes wrong does not look cheap by default.
Every loan has a section in its terms, or a separate fee schedule, that lists these charges. It is usually a page or two of small print, under headings such as fees and charges, early redemption, or late payment. Treat it as part of the price, the same as the rate, because it decides the gap between the cash you get and the sum you pay back. Have a calculator next to you when you read it.
Take one loan offer and list every fee in its terms. Then work out the cash you receive and the total you repay.
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