Interest rates are, to put it simply, the true cost of borrowing. It’s a concept that is easy to overlook but is the basis for an entire industry, without which banks, lenders, and financial markets would struggle to function, and access to credit would be severely limited.
That being said, the information asymmetry between borrowers and lenders makes it necessary for us to delve a little into bank interest rates, if only to help you, the borrower, make a more informed decision on your loans. Buckle up and sit tight as we explore the different types of bank interest rates in Singapore.
Both these terms describe how interest rates are charged on your borrowed amount.
Flat rates / APR / Marketing Rate: A flat rate interest is calculated based on your original borrowed amount. With flat rates, the interest you pay remains unchanged throughout the tenor, and your total interest increases if you choose a longer repayment tenor.
Reducing rates / Effective Rate: Reducing rates, also known as Monthly Rest Rates, are calculated based on the outstanding amount of your loan at the end of the previous month. This means that the interest you owe the bank reduces over time, along with the reducing principal.
Both these terms refer to the value of the interest rate being levied on your loan.
Fixed rates: Fixed interest rates, as its name implies, are interest rates that remain unchanged. They are less common, but are offered by certain banks to attract borrowers.. These fixed rates are usually only available for a specific period known as the lock-in period, after which it reverts to floating rates again.
Floating rates: These are interest rates that change in response to fluctuations in market conditions, usually pegged to a benchmark rate. Banks use the Singapore Overnight Rate Average (SORA), determined by the Monetary Authority of Singapore (MAS) to decide on their interest rates. A decrease in SORA levels over an extended period usually results in rate cuts and vice versa.
Interest rates are dynamic, and banks often have to adjust their interest rates according to fluctuations in benchmark rates.
You may notice different banks offering slightly differing interest rates, even on similar personal loan products. A closer look will reveal that these differences are not significant and fall within a certain range. Here are some of the key factors contributing to the variation in interest rates between different banks and different loan products.
Demand is one of the key factors that drive interest rates up or down. High demand for personal loan products will usually result in higher SORA rates, leading to an increase in interest rate values. Local and global economic forces indirectly contribute to this as well. A rapidly growing economy will lead to a higher demand for loans, allowing banks to gradually raise rates.
The reverse is also true. In periods where the economic growth slows, demand for loans also decreases leading to rate cuts. These rate cuts may sometimes be the result of government policy as a way to encourage more borrowing among consumers and businesses, helping to channel more finances into the market since lower interest rates make loans more affordable.
The attitude of borrowers can also be a driving force for the fluctuation of bank interest rates. When more borrowers choose to defer the repayments of their loan, this leads to a decrease in the amount available in the market for credit. This leaves the bank less available funds to lend out, and increases the interest rate in general.
The reverse can also happen. When more borrowers take on loans and make timely repayments. This can lead to an increase in supply of credit for the bank to invest, do business and lend out. An increase in credit supply will eventually lead to lower interest rates.
On a personal level, your own credit history can influence the rate you may receive from the banks. Good creditworthiness and repayment records will usually put you in a bank’s good books, and they will be willing to offer you lower interest rates in general. This is because they perceive your risks of defaulting to be fairly low, and can trust you to make repayments in a timely manner and in full.
On the other hand, borrowers whose credit scores are less than ideal may encounter interest rates that are on the higher end of the spectrum. This is due to their higher perceived risks of defaulting or delaying repayments.
The type of loan you take can also influence the interest rates levied by the banks. In general, loans that are perceived to pose high risks of defaults will feature significantly higher interest rate ranges. Examples of personal loans and financing products with higher interests include credit cards and personal lines of credit (whose interest rates can go as high as 25-27% p.a.).
Products with mid-range interest rates (4-9% p.a.) include personal loans, debt consolidation loans, and wedding loans. Those with the lowest interest rates (1-3% p.a.) include the likes of study loans, car loans and home loans. Usually, loan products targeted for specific use, such as renovation loans, study loans, and the like will feature more attractive and affordable interest rates.
It’s no secret that as borrowers, we all want the most affordable interest rates and monthly repayments on our loans. To achieve that we recommend you begin your journey here at Lendingpot where you will have access to multiple lenders, including some of Singapore’s leading banks.
You will be able to receive loan offers from various lenders once you register, and can then compare these offers to obtain the most favourable loan terms and conditions. Reach out to us should you have any questions and our experts will help guide you through.
.png)
.png)
.png)
