How are Personal Loan interest rates calculated?

The 3 main components to calculate personal loan interest are loan amount, loan tenure and annual interest rate.

Loan amount is known as the amount you are keen to borrow. In Singapore, you are allow a maximum loan amount of 4x your monthly income. Eg. If you monthly income is $2500, your maximum available loan amount is $10,000.

Loan tenure is your preferred loan tenure in years. You are allow a maximum loan tenure of 5 years and a minimum of 1 year.

Annual Interest Rate is known as the interest rate charge to you by the financial institution. Generally, the interest rate for Personal Loan ranges from 4% to 15% per annual.

Personal Loan Calculation case study

Mr Tan monthly income is $2500 and took a $10,000 personal loan from Bank A at an interest of 4%.
He chooses repayment tenure of 5 years.

Annual Interest Rate= 4%
5 Years Interest Rate= 4% x 5 years = 20%

Total interest paid to Bank A for 5 years = Total personal loan amount x total interest for the full loan tenure = $10,000 x 20% = $2000

Total Personal loan = $10,000
Total Interest Paid = $2000
Total Tenure = 5 years = 60 months
Monthly Instalment = (Total personal loan amount + Total interest paid) / Total tenure = ($10,000 + $2000) / 60 = $200

Additional cost to Personal Loan

Some financial institutions might have additional charges on their personal loan. Additional charges such as

  • Admin fee – the fee for the bank to process and approved borrower’s personal loan
  • Insurance fee – this charges is to pay bank for insurance coverage of your loan amount should it got mishandled (eg, funds was transfer to wrong account)

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