Things to Watch Out for

What are the costs of borrowing?

This would comprise the interest payable as well as any fees or other charges applied.

Advertised and effective interest rates

You will come across the terms advertised and effective interest rates.

The effective interest rate is the actual interest rate you pay for using the loan facility. This may be different from the advertised rate. Ask the lender for both the advertised rate and effective interest rate. If you are offered different packages with different interest rates, loan periods and repayment methods, compare the effective interest rate for each package to find out which package costs the least in interest payments.

The higher the effective interest rate, the more interest you will be paying. But do note that interest payments are not the only cost of borrowing money. Other charges may apply, including legal, processing and default fees.

The effective interest rate may be higher than the advertised rate due to the way interest is calculated. For example, in a flat rate loan, interest is calculated upfront and added on to the loan amount. In this case, the effective interest rate is higher than the advertised rate because the same rate (advertised rate) is applied throughout the loan period even though the outstanding loan amount has reduced due to monthly repayments. In the case of the monthly rest method of interest calculation, the advertised rate is the same as the effective interest rate, because interest is calculated based on the reduced balance of the loan.

It is not always the case that you should take a package with a lower effective interest rate. For instance, you may decide on a package with a higher effective interest rate if you intend to pay it off quickly and are able to do this without incurring an early repayment penalty.

Fixed and floating rates

A loan with a fixed rate of interest means the interest rate applicable throughout the loan period (or a limited part of the loan period) is fixed. While some borrowers prefer the certainty of a fixed rate, the risk is that interest rates start to fall after the rate is fixed and the borrower is unable to enjoy the lower interest rates.

For floating rate loans, the interest rate is pegged to a reference rate and can be adjusted at the discretion of the lender throughout the loan period. If floating rates rise, you will pay higher rates but if interest rates fall, the rate you pay will also fall. In the event the value of the reference rate is negative, most financial institutions will treat the reference rate as 0% for the purpose of computing the interest rates.

If you take out a floating rate loan and interest rates move up, your interest expense will be higher – do factor this in when deciding if you can afford a loan.

Calculating interest

Interest payments make up the main cost of taking out a loan. Therefore, do find out how interest is calculated and how much interest you have to pay before you decide which loan to take. Here are some examples:

Annuity on monthly rest 


Commonly used for calculating interest on home loans.

For example, if you have a $600,000 loan payable over 20 years at 3.5% per annum, you will have to make 240 equal monthly repayments of $3.480. Many financial institutions use annuity tables to determine the monthly repayments. An example of a payment schedule for the first 5 years is as follows:

Year Interest Rate Principal + interest = repayment (every month)
(The principal is the amount you borrow)
Principal + Interest = Repayment (every year)
Principal Interest Repayment/month
1 3.50% $1,729.76 $1,750.00 $3,480 $41,757
2 3.50% $1,791.28 $1,688.48 $3,480 $41,757
3 3.50% $1,854.99 $1,624.77 $3,480 $41,757
4 3.50% $1,920.97 $1,558.79 $3,480 $41,757
5 3.50% $1,989.29 $1,490.47 $3,480 $41,757


Repayment is usually in arrears. This means that the first monthly instalment is due one month after the loan period starts. If the financial institution uses the advance repayment mode, you have to pay your first instalment once the loan period starts.

Flat rate

Commonly used in vehicle loans on hire purchase.
Interest is computed as a lump sum upfront and added to the loan amount to derive the monthly instalment repayment.
Example: $70,000 loan at 3.75% per annum, payable over three years.

Interest = $70,000 x 3.75% x 3 years = $7,875
Monthly Instalment = ($70,000+$7,875)/ 36 months = $2,163.19

Flat rate discount

A flat rate discount in interest applies to some unsecured loans. The interest amount is deducted upfront from the loan amount, and the borrower receives only the net amount. However, the monthly instalment is based on the full loan amount.
Example: $12,000 loan at 5.5% (discounted) per annum, payable in one year.

Interest = $12,000 x 5.5% =$660
Net proceeds of loan = $12,000 - $660 =$11,340
Monthly instalment = $12,000/12 months = $1,000

Fixed principal repayment

Under this method, you pay a fixed amount in principal and a variable sum in interest every month.
Example: $12,000 loan at 5.5% per annum, payable in one year.

Month 1 instalment = $1,000 + $55 = $1,055
Month 2 instalment = $1,000 + $50.42 (interest on outstanding only i.e. 5.5% x 11,000 /12) = $1,050.42

Fees and charges

Here are some common fees and charges when borrowing:

Fees and charges For 
Processing fee For processing the loan application (usually charged upfront upon loan approval)
Amendment fee For changes to the original loan application
Cancellation fee For not taking up or drawing down on the loan after accepting it
Excess charges For drawing more than the original overdraft limit
Late payment charges For not repaying the amount due by the payment due date
Default charges For failing to make payment 
Prepayment fee For paying part or the whole loan earlier than originally agreed.

Besides your lender’s charges, there may be third-party costs. For example:

Fees  To For 
Valuation fee Professional appraiser Valuation report on the property to be financed
Legal fee Lawyers Processing the mortgage over the property to be financed
Stamp duty Government  Registration of the mortgage
Insurance premium Insurance company Insurance cover for your property against fire and other damage. Lenders will require you to adequately insure assets being financed.

Financial institutions can change terms, including interest charges by giving notice.

Understanding your loan agreement

Do read all the forms and documents you are given, especially those you have to sign. If you are required to acknowledge that you have read something which you haven’t been given, make sure to ask for it and read it first before signing. Take your time to understand everything and ask the bank officer if there is anything you do not understand. You should not sign up on the spot if you are unclear or unsure of something or need more time to think over what is being offered to you.

Be aware that once you sign the documents, you are assumed to understand all the terms and conditions they contain and will be contractually bound.

List of banks and finance companies regulated by MAS

Access the MAS website to check if the banks or finance companies you are dealing with are regulated by MAS.

List of moneylenders licensed by Insolvency & Public Trustee's Office


Moneylenders are licensed by the Registry of Moneylenders, a division of the Insolvency & Public Trustee’s Office (IPTO), to grant loans to individual borrowers. In doing so, moneylenders must comply with the law, which contains safeguards to protect the interests of borrowers. These safeguards include restrictions on the loan amounts moneylenders can grant, as well as on the interest rates and fees that they can charge borrowers. For more information on your rights and obligations as a borrower, please refer to the “Notes to Borrowers when Obtaining Loans from Licensed Moneylenders” on the IPTO website.

You are also advised to check whether a moneylender is licensed by referring to the list of licensed moneylenders on the IPTO website.

You can contact the Registry at 6325-2585 or if you have any queries about licensed moneylenders. 

Borrowing from friends and relatives

If you lend money to a friend or family member and then realise that he or she cannot pay you back, consider taking the following actions to recover the money.

  • Meet the debtor to settle the repayment directly. You should keep the contact numbers as well as home and office addresses of the debtor.
  • Get another friend or relative to help you facilitate a satisfactory settlement
  • Approach the Community Mediation Centres, a department under the Ministry of Law, to help mediate where there is no written contract between the parties.
  • Get a registered debt collector to deal on your behalf, but you should find out the company’s terms and conditions first.
  • Take legal action, but first get your lawyer to advise you on what avenues you can pursue and find out how much it costs to make a claim in court. It may be an expensive process.


The above information is prepared in collaboration with the Ministry of Law and Association of Banks in Singapore.