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© 2020 by Devise Business Consultancy

Interest Rates In Singapore

Understanding Interest Rates For Business Loans

When you are ready to source around for a business loan, there are always a few important questions in mind.

How much money can you get? What’s the interest rate? How long is the repayment period?

But there’s another question that everyone should be asking:

“What are the rates and types associated with this loan?”

A business loan might look like a great deal—until you factor in the fees, costs, and penalties you didn’t know to look out for. 

So what is an interest rate in a definition?

An interest rate is defined as the proportion of an amount loaned which a lender charges as interest to the borrower. 

It is what you pay on top of what you borrow from a lender. Lenders charge interest so they can make a profit off letting people borrow their money. And generally speaking, the “riskier” your lender believes you are, the higher your interest rate will be.  

Basic Calculation Of Interest Rates

Simple Interest and Compound Interest

Simple interest is a straightforward calculation that takes into account the amount you’re borrowing, the yearly interest rate, and the amount of time you’ll be paying the loan back. It is usually the type of interest that alternative lenders used to tabulate. 

 

Here’s the formula:

Simple interest = Principal x Annual Interest Rate x Duration of Loan (Years)

Compound interest, on the other hand, a bit more complicating. —it compounds, or recalculates, your repayment based on monthly payments. When you repay a loan, you may end up paying interest on interest, and compound interest takes that into account.

Whichever formula you use to calculate your interest rate, the idea is the same. Your interest rate is the basic percentage of what you’ve borrowed that you’re paying back to the lender.

Effective Interest

The effective annual interest rate is the interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of compounding over a given time period. It is also called the effective interest rate, the effective rate or the annual equivalent rate.

EIR stands for the total true cost of taking a loan. As in a loan wise, the interest rate is not the only cost, whereas admin cost is to be factored in as well. 

It is subjected to the loan tenure. EIR also considers the effect of compounding.

Banks and financial institutions in Singapore are required by MAS to publish the EIR.