Cost of taking out a loan: Different types of interest rates

Different types of interest rates when taking out a loan

Taking up a loan in Singapore? Before you assume that taking a fast loan in Singapore is as straightforward as borrowing a sum of money and then repaying it, think again. A legal loan in Singapore will require you to pay interest and processing fees – this means you’ll have to repay more than what you initially borrowed.

Just like how a licensed moneylender can charge up to 4% in interest per month, other financial institutions can also charge varying amounts of interest on your loan. How much you end up repaying depends on the types of interest rates used and how they are calculated.

Read on to find out the common types of interest rates in Singapore that you need to take note of.

1. Fixed Interest Rate

This is a common type of interest rate used on loans in Singapore. As the name suggests, the interest is fixed throughout the repayment period. The upside for such an interest type is that it does not fluctuate over the loan period hence allowing borrowers to have an accurate estimation of the repayment amount. On the downside, the fixed interest rate is usually higher than the variable interest rate because it is hedged against external factors that might increase the interest over time.

2. Variable Interest Rate

A variable interest rate, also known as floating rate, is an interest that adjusts over time in response to changes in the market. When the underlying benchmark rate or index rises or falls, it affects the variable interest rate paid by the borrower. For example, when it comes to legal home loans in Singapore, the variable rates are usually tagged to Singapore Interbank Offered Rate (SIBOR) or Fixed Home Rate (FHR).

An advantage of such an interest is the possibility of getting a lower rate should the underlying index decline. Conversely, if the underlying index rises, the interest rates might increase too.

3. Simple Interest Rate

A simple interest rate simply means a fixed interest rate of a principal amount to be paid over an agreed period. For example, when a couple decides to take up a S$10,000 fast loan in Singapore to fund their wedding from a licensed moneylender at an interest of 4% and repayable within a month, the interest charged is simply 4% of the loan amount.

The calculation for loans that are based on such rates is very basic and is generally expressed with straightforward multiplication of principal amount, interest rate, and the period agreed.

4. Compound Interest Rate

Compound interest is the addition of interest to the principal sum of a loan when it is not repaid. The methodology is called interest on interest. To understand this, think of a loan balance as two key components – the principal amount and the interest incurred from the loan. The lender will apply the agreed interest on the loan balance and the interest incurred to calculate the subsequent year’s interest payment

To illustrate this, let’s use an example of a S$10,000 loan in Singapore at 10% interest per annum. If the loan is not repaid by the end of the first year, the total amount owed would be S$11,000. At the end of the second year, the new balance would be S$12,100. The S$1,000 of interest incurred in the first year has incurred its own interest of S$100!

While compound interest can be a good thing for earning on deposits, it is not the same if it is used on loans. Compound interests can get expensive for borrowers and when a loan is not well managed, they can end up owing a lot more money than they initially intend to.

5. Effective Interest Rate

An effective interest rate (EIR) is the true cost of taking a loan in Singapore, taking into account the compounding effects over time. The cost depends on how long your loan tenure is and repayment frequency, as well as the number of instalments.

Typically, effective interest rates are higher than advertised interest rates. This is because advertised interest rates only consider the interest you are supposed to be paying. For example, if you are taking a $2,000 loan at 10% p.a. Interest, you are expected to repay $200 in interest annually. But EIR considers other factors such as processing fees, hence you could end up repaying more than that.

6. Reducing Balance Rate

Also known as the diminishing balance rate, the reducing balance rate only charges interest on your loan’s remaining balance. This effectively reduces your interest repayment each month as you continuously pay off your principal loan amount. This is perfect for lengthy loan tenures as you save more over time.

Here is a simple formula for calculating your payable interest following the reducing balance rate:

Interest amount per instalment = Effective interest rate per instalment x Outstanding loan amount

7. Annual Percentage Rate

The Annual Percentage Rate (APR) is an annual rate charged for a loan in Singapore and is widely used for most financial solutions – from mortgages and car loans to credit cards. So how does it work?

Every time you take out a loan, there is a cost involved which is the interest, which ultimately adds up to the total loan cost. Every month, you are essentially paying a portion of the principal loan and a portion of the interest.

Two types of APRs can be applied – fixed and variable. A fixed APR means the rate remains the same throughout the entire loan term, while a variable APR means fluctuations. APRs can change anytime according to market variability and the borrower’s ability to repay on time, however, lenders are required to provide advance notice on the change and why.

The annual percentage rate considers all other borrowing costs such as administrative and late fees, however, it does not account for the compounding effect of interest. So, when looking for a legal loan in Singapore, between two offers that present the same nominal rate and monthly payments, choosing the loan package with a lower APR will usually require lesser upfront fees and offer a better deal.


Understanding the different types of interest rates can be complex, this is why it is important to find a licensed moneylender who can provide reliable advice and competitive rates when you need a loan to fund your projects. At Galaxy Credit, we offer a wide selection of loans such as personal loans and business loans. Contact us for a free consultation now.


While we try to provide the most accurate information on this website, it may not reflect the most current developments. The information on this website may be changed without notice and is not guaranteed to be complete, correct, or up-to-date. All information provided is for informational purposes only and shall not be relied upon as professional advice. We shall not be liable for any loss or damage resulting from the use of this website.

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Whether you are a Singapore citizen, permanent resident, or foreign worker residing in Singapore, securing a personal loan in Singapore has never been easier. As long as you qualify for the type of loan you are applying for, the process is pretty simple, quick, and straightforward. If you’ve reached a tough spot financially and are in need of emergency cash with the lowest personal loan rates, here are some tips you should follow when considering applying for a legal loan in Singapore.

1. Check your credit score

A credit score is used by banks, financial institutions, or licensed money lenders to gauge the likelihood of you paying off your loans on time. If you want to get the lowest personal loan rates, you have to have a substantial credit profile that shows a higher credit score or rating.

The higher your credit score, the more likely you are to get approved for a personal loan in Singapore as it shows creditworthiness. As these credit reports are sourced from a credit bureau, you will also be able to source your own credit report by requesting a copy online or from Credit Bureau Singapore for $6.42.

2. Don’t apply for too many loans at once

For a smooth sailing loan application process, you have to ensure you do not have too many loans running at once. When you apply for too many loans at one go, lenders will raise an inquiry with the credit bureau to evaluate your creditworthiness. These can be considered hard inquiries where a lender is initiating a credit inquiry on behalf of the borrower.

Bear in mind that with each direct inquiry from a legal moneylender, there is a possibility that the loan evaluation process will be further scrutinised. Rather than having multiple credit inquiries, it is much more ideal to figure out the various types of legal loan options available and identify the right fit before applying for a loan.

3. Plan your budget before applying

As with all financial plans, it is best to budget well at the very beginning, before you even apply for a loan. This step is crucial to ensure that you can repay the loan on time to avoid late fees and extra charges. If you have a gauge on the range of monthly instalment payments that you are financially able to commit to, it will be much easier to choose the type of loan in Singapore.

Doing it this way would mean that you would already know the maximum interest fee you can commit to. Budgeting wisely also requires you to look at timelines to help you work out a comfortable repayment agreement or loan tenure.

4. Prepare substantial proof of income

You must have the right documents so that you can have a smooth sailing loan application process. These include your NRIC; proof of income and employment documents such as your last 3-6 months of payslip or income tax notice of assessment (NOA); current credit report; past CPF statements; proof of residence or tenancy agreement; employment letter; employment pass and bank statements (for foreigners).

It is usually not difficult to secure proof of income for employees having a monthly salary arrangement. However, other employment arrangements like commission-based work or self-employment may prove more complex for verifying future income. Regardless of the reason, it is usually a must for borrowers to find a way to prove that they will honour their debt.

If you are applying for a personal loan without formal proof of income, you can consider showing past bank statements that indicate regular payment from an employer or credit card statements to show that you have paid your bills on time. The credit history reflects your past credit management so it can be used as an indicator of creditworthiness. Documentation of annual tax returns from IRAS can also help your cause. You should also protect your credit score to get a higher rating. Lastly, you can also consider providing a larger amount of downpayment to secure a reasonable loan tenure.

Ultimately, applying for a personal loan in Singapore is not difficult. As long as you follow the tips above and ensure you have the necessary documents on hand, you will experience a quick and seamless application and approval process.

Interested in securing a personal loan in Singapore? Find out more about your legal loan options with us.

Your personal loan in Singapore was approved by a licensed moneylender – congratulations! Now comes the challenging part – sticking to the repayment schedule. There are two reasons why it is important to repay your loan as scheduled.

Firstly, there are monetary penalties every time you are late on a payment. This includes:

  • A one-off late payment penalty every time you fail to pay the monthly instalment by the set date. This fee is capped at $60 per month.
  • Interest on the amount due. This is calculated at up to 4% of the amount due for that month (not the outstanding loan balance).

Secondly, the cumulative debt that you incur as a result of these penalties makes it more likely that you will default on future payments. Remember, a failure to meet your financial obligations today can have catastrophic effects on your credit rating for years to come.

But not to worry, we have got your back! Here are 4 simple and proven ways you can use to adhere to your personal loan repayment plan.

1. Adjust the instalment due date

If you are employed full-time and have a constant monthly stream of income, it is important to keep your payday in mind when it comes to repaying your personal loan. Also consider last-minute purchases and emergency expenses, which will affect your repayment schedule.

Once you have a clear idea of when you receive your salary every month, approach your licensed moneylender and ask for a revised due date for your monthly instalments. As there may be administrative expenses involved with the amendment, it is best to be absolutely sure before informing your lender.

2. Know your finances

This method is all about how well you know your finances. Before you can even determine a feasible repayment plan for your personal loan in Singapore, you need to first assess your current income and expenses.

While there are many free apps today that can help ease the burden of recording your daily personal finances, you still need the discipline to keep this habit consistent. Just think of how invaluable this information will be in helping you see where your money is going and how you can cut back on unnecessary expenses in time for your next repayment.

3. Prioritise your debts

Now that you know where to cut back on expenses, the next step is to determine where your income will go. All debts are not created equal and you have to determine the order of which gets paid first and that depends on two factors:

  • Size of each debt
  • The interest rate on each debt

Together, they dictate the amount by which your debt increases if you do not pay them in full. The idea is to gradually climb out of the debt by ensuring that you either maintain or reduce the amount owed.

You can use either the debt snowball or debt avalanche strategy to accelerate debt repayment.

Debt snowball – List all your debts – from smallest to largest – and make the minimum payment every month to prevent further increase in debt. Pay off the smallest debt first as best you can, and make minimum payments to the remaining debts with any money left. Over time, you will pay off that debt, and you can apply the same strategy to the next smallest debt.

Debt avalanche – List all your debts and make the minimum payment on all debts every month. Pay off the debt with the highest interest using any money that remains. Over time, you will pay off that debt, and you can apply the same strategy to the next high-interest debt. In this way, you are essentially decreasing the amount of interest you are paying.

4. Be mindful of your spending

Last but not least, budget carefully. Before taking out a personal loan in Singapore, be sure to assess your current spending and ensure that it doesn’t clash with your repayment plan. This comes with some financial planning and discipline.

If you realise you’re someone who tends to overspend, then it is time for some serious introspection on your finances and addresses the true cause of perpetually being in debt. How you spend is in your control and it is one of the best long-term solutions to having a solid financial future.

Good thing is, we’re here to help you.

Galaxy Credit is a licensed money lender that specialises in helping you secure a personal loan in Singapore. Talk to us today about our loan solutions.


When applying for a personal loan in Singapore, you need to ensure you have all the documents required to get a loan. You should be aware of the documents that are needed and know how much you can borrow. Having your income details and proof of employment on hand will certainly help with your application.

The documents that are required will depend on the bank or moneylender you choose but generally, they will require these essentials:

  • Proof of Income
  • ID copy
  • Employment information, like Employment Pass or CPF statement.

Proof of Income

If you want to borrow money from banks or financial institutions then an income statement will be required. The bank will ask for your income level and salary details so they can check if you qualify for a certain amount of loan.

In short, documents you may need for proof of income includes:

  • Contribution statement to your Central Provident Fund (CPF)
  • Latest income tax Notice of Assessment
  • Latest computerised payslip
  • Bank statement showing salary crediting into your bank account
  • Other income statements as required

ID copy

If you are applying for a personal loan, the lender will ask for a photocopy of your identification card, like your NRIC or Employment pass card just to confirm your eligibility and legal status.

Employment information

If you are applying for an employee loan, then the lender will ask for your employment details such as your Employment pass card or CPF statement. The lender might also ask for proof of employment like an employment contract, job offer letter, and details of salary and bonus.

Tips to secure a personal loan in Singapore

You should carefully evaluate your current financial needs and your earning power. Plan and record your monthly budget and expenditure to establish a monthly repayment plan that you are comfortable with.

Loan Amount

This is the most important factor to consider when applying for a personal loan in Singapore. Knowing the correct amount of loan required will allow you to choose the right type of personal loan. It is also important that you obtain the lowest personal loan rates that suit your needs and try not to surpass your borrowing limit.

Loan Tenure

The loan repayment period is also crucial in determining the length of time you have between monthly instalments. Ideally, you will plan to quickly repay your personal loans and avoid incurring late payment fees and an accumulation of unwanted debts. Remember, the inability to repay your loans on time and in full will eventually affect your credit score.


Besides the obvious interest rate fees, there are also processing fees charged by both banks and moneylenders to process your loan application. Do check thoroughly to determine if other hidden fees are involved as they will affect your total loan amount. Also, clarify on late payment fee charges and their late payment interest rates before signing anything.

Avenues for personal loan promotions

Sometimes, there are special loan deals offered by both banks and licensed moneylenders. Banks, which are typically the big players in Singapore’s finance hub, often advertise personal loan promotions on an ad-hoc basis via their websites, newspapers, financial sites, or social media platforms. Licensed moneylenders, on the other hand, advertise their services on their corporate website, business directories, or via posters at their registered offices.

If you are looking for a flexible and affordable loan in Singapore, visit Galaxy Credit. We offer the lowest interest rates on our loans and have a quick approval process. We have personal loans to cater to your needs. Talk to us and we will help you fill out an online application!