There are many things to note when borrowing money from licenced money lenders – among those is the fact that almost all loans in the world come with some form of interest. Essentially, interest is a fee that a bank or money lender charges for allowing you to borrow a specific amount of funds. It is important to understand more about interest rates and how much of them can be charged on loans because some money lenders – specifically those who are not authorised by law – tend to charge exorbitant fees. These excessive interest rates are sometimes referred to as ‘usurious interest’.
If you have been shopping around for easy cash loans, then you have probably noticed that banks and money lenders usually advertise only two different interest rates: Effective Interest Rate and Annual Flat Rate. If you don’t know how these interest rates differ from each other and why the difference matters, this article is right for you! Read on to understand the essential distinction between an Annual Flat Rate and an Effective Interest Rate.
Annual Flat Rate
Flat rates are a type of interest rate that remains the same on the principal amount throughout the duration of your loan. The Annual Flat Rates is very simple and easy to calculate since each year, your bank or money lender will charge you a flat rate of X% on your principal loan until you have completely paid the money back. It is important for you to understand how your Annual Flat Rate works because it will decide how much you have to repay to your money lender every month.
For instance, if you were to borrow $5,000 at 6% interest for one year, you would have to pay an interest of $33 every month on top of the principal loan amount, thereby making the overall monthly repayment of $450 per month. The overall payable interest would then be $400.
Effective Interest Rate
Unlike the Annual Flat Rate, the Effective Interest Rate demonstrates the true economic cost of your loan, which means that it can be a little bit complicated to understand. As such, reliable money lenders will likely take the time to ensure you understand precisely what this rate entails. Most instant cash loans in the country have an upfront fee that can reach a maximum of 10%, which will be deducted from your loan at the beginning. Since it is a cost, your money lender will calculate how much this fee augments your Effective Interest Rate.
For example:
Effective Interest Rate: Inclusive of 3% (for Applied Interest Rate of 7.99% p.a.) or 2% (for Applied Interest Rate of 5.88%) or 4% processing fee (for Applied Interest Rate of 11%)
However, the processing fee is far from being the only factor that can cause your Effective Interest Rate to become higher. The important thing to understand here is that you do not get to utilise the full amount of money you borrowed for the whole duration of your loan. This is because the monthly payment you make to your money lender includes both your principal payment and the interest. To put it simply, you are repaying some money each month, but it has no effect on lessening your interest payment.
Conclusion
Most loans come with interest. If you are specifically looking to borrow money from a legitimate money lender in Singapore, the Annual Flat Rate and the Effective Interest Rate are the two interest rates you should be familiar with. When people say that the Effective Interest Rate is the only important thing in a personal loan, it would be best not to take their advice. Whenever you apply for a loan, you need to ensure that you can comfortably handle your monthly payment – this includes the principal amount of your loan and its corresponding interest.
If you are looking for a licenced money lender to provide you with trusted loans that come with fast loan approval in Singapore, look no further than Orange Credit! We are a reputable money lender offering a wide range of loans with reasonable interest, ideal for a variety of financial needs, including personal loans, payday loans, business loans, bridging loans, debt consolidation loans, and more. Please do not hesitate to get in touch with us anytime to find out more about our loans.
