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 then repaying it, think again. A legal loan in Singapore will require you to pay for interest and processing fees, this means you’ll have to repay more than 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 to your loan. How much you end up repaying pretty much 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**

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 money lender at an interest of 4%, repayable within a month, the interest charged is based on a simple interest rate.

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. Annual Percentage Rate**

First and foremost, the Annual Percentage Rate (APR) is not the same as the interest rate. The APR is always higher than the interest rate because it includes all fees such as broker fees, closing costs, rebates, and discounts; costs that are associated with procuring the loan. That said, it is good to note that while the interest rate determines the cost of borrowing money, the APR can more accurately provide the total borrowing cost.

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.

**Conclusion**

Understanding the different types of interest rates can be complex, this is why it is important to find a licensed money lender who can provide reliable advice and competitive rates when you need a loan to fund your projects. At GalaxyCredit, we offer a wide selection of loans that cater to individual and enterprises’ needs. Contact us for a free consultation now.