What Even Is Interest? A Simple Guide to Understanding Loans

Key Takeaways

Interest rates in Singapore vary based on loan type, lender and borrower profile. Licensed moneylenders can charge up to 4% monthly interest on outstanding balances, while credit card interest rates typically range from 25% to 26% per annum . Understanding the difference between simple and effective interest rates is crucial, as effective rates account for compounding and provide a more accurate cost of borrowing . For housing loans, interest calculations consider factors like market conditions, property price, loan amount, credit score and loan tenure . Borrowers are advised to compare loan offers and understand the terms to make informed financial decisions.

Interest is a word you hear all the time when it comes to loans and savings. Terms like SIBOR and SORA can sound like alphabet soup if you’re not in finance.

Put simply, interest is something you deal with whether you’re borrowing money or putting it aside to grow. Knowing how it works helps you make better decisions when it comes to managing your money.

Here’s a simple guide to understanding interest in loans.

Why Does Interest Matter?

Interest is what you pay when you borrow money and what you earn when you save it. When you take out a loan, the lender charges you interest. When you save money in a bank, the bank pays you interest.

It sounds simple, but things can get tricky when you look at how interest is calculated and how often it’s applied. In Singapore, there are also different benchmarks that affect interest rates, which can make things more confusing.

Key Interest Rate Benchmarks in Singapore

Let’s look at some of the main reference rates that banks and lenders use to set interest rates.

SIBOR (Singapore Interbank Offered Rate)

SIBOR is the rate that banks use to lend money to one another. It’s been a common benchmark for home loans in Singapore. But SIBOR is being phased out by the end of 2024. If your mortgage is tied to SIBOR, check with your bank on how it plans to switch your loan to a new benchmark.

SOR (Swap Offer Rate)

SOR is based on currency exchange rates between the US dollar and Singapore dollar, along with US interest rates. It’s more relevant to big corporate loans than personal ones and it’s also being phased out.

SORA (Singapore Overnight Rate Average)

SORA is the new standard interest rate benchmark in Singapore. It shows the average rate that banks pay when they borrow money from one another overnight, using actual transactions instead of estimates. Because it’s based on real market activity, SORA is considered more transparent and less prone to sudden changes.

Banks have started using SORA as the preferred benchmark for new home loans. If you’re applying for a mortgage now or in the near future, it’s very likely that your loan package will be tied to SORA instead of the older SIBOR or SOR benchmarks.

Understanding Credit Card Interest Rates

Credit cards are convenient, but if you don’t pay your bill in full, the interest can add up fast. In Singapore, most credit cards charge 25% to 28% per year on unpaid balances. If you take a cash advance, the rate can be as high as 29.9% per year. What makes it worse is that interest is charged daily. So the longer you wait to pay, the more you owe. A simple dinner bill can snowball into a much bigger debt if left unpaid. Best practice? Always pay your full balance on time. Or only spend what you can afford to clear each month.

Interest Rates for Personal Loans

Personal loans are more affordable than credit cards. They’re commonly used for things like weddings, medical bills, or debt consolidation. The average interest rate for personal loans in Singapore is around 6% per year. Some lenders offer lower rates as little as 1.8% per year, if you have a good credit score. Unlike credit cards, personal loans usually have fixed monthly payments, so you know exactly how much you need to repay each month.

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Legal Limits for Private Moneylenders

If you can’t get a loan from a bank, licensed moneylenders are an option. But they are closely regulated to protect borrowers.

Here’s what licensed moneylenders in Singapore are allowed to charge:

• Interest rates: Up to 4% per month on the outstanding loan amount.
• Late payment fees: No more than $60 per month.
• Administrative fees: Up to 10% of the original loan amount.

Also, the total charges (interest, admin fees, late fees) can’t be more than what you borrowed. So if you take a $1,000 loan, the most you can be charged in total is $1,000.

Always make sure you’re dealing with a licensed moneylender. Unlicensed moneylender ones can be dangerous and break the rules.

Impact of Interest Rates on Borrowing and Saving

Interest rates affect both loans and savings. Knowing how they work helps you make better decisions.

When Interest Rates Are High

• Borrowing costs more: Loans and credit become expensive.
• Saving is more rewarding: Banks offer better returns on savings and fixed deposits.

When Interest Rates Are Low

• Loans are cheaper: It’s a good time to take or refinance a loan.
• Saving earns less: You may need to explore other ways to grow your money.

Adjust your strategy based on where interest rates are heading.

Tips for Managing Interest Rates

Here are a few ways to stay on top of interest rates and use them to your advantage.

For Borrowers:

• Shop around: Don’t settle for the first offer. Compare interest rates and terms.
• Read carefully: Check for extra fees and penalties.
• Keep your credit healthy: A better credit score can get you lower rates.

For Savers:

• Maximise your savings: Look for accounts that reward you for crediting salary or spending on a linked card.
• Use fixed deposits: These can offer higher interest when rates are going up.
• Think about alternatives: Low-risk investments like government bonds can give better returns than a savings account.

Conclusion

Interest doesn’t have to be confusing. Once you understand how it works, you can make better choices, whether it’s borrowing smart or saving wisely. If you’re thinking about a loan or trying to grow your savings, staying informed about interest rates is a smart move.

Planning for a Personal Loan?

Contact our financial experts at JNB Credit today to make the most of your money. Apply now!