Monday, February 01, 2010

Cash loan - 16% effective rate

Dear Mr. Tan,
Financial Institution: (bank)
Amount of loan: $1500
Purpose of loan: Personal use
Number of repayments: 12
Amount of monthly repayment: $136.10

You are paying a total interest of $133.20. This works out to 8.9% of the amount that you have borrowed. However, as you have to make monthly repayment, the outstanding balance of the loan reduces monthly. Based on the average amount that has been borrowed, the effective interest rate is 16% per annum.

The bank pays 0.5% to its customers on their savings. They charge 16% on loans given to other customers, giving a hefty margin to make a good profit for the bank.


Anonymous said...

Banks are operating like Ah Long and it is legal. Ah Long not legal becuase they don't pay corporate tax
and they use unacceptable means to recover bad debt.

Anonymous said...

REX comments as follows,
this seems to be a very small loan just only $1,500. could be actually drawn from credit card or overdraft facility for more convenience rather arranging a formal bank loan... The interest... 16% is around the same as what the credit card co. charges 20% i think. It seems to be the norm for short term loans, 16 to 20%. This figure has been around for ages i think, i am not sure what is new?


Robert Tan said...

Best to avoid taking any unsecured loans - they are not cheap. Even S$ prime rates exceed 5%.

Try to have enough savings for emergency and as much as possible buy when you have saved enough to buy in cash.

If you have to buy with loans, at most, try to buy only assets which you can use as collaterals for secured loans (eg: Home loans) because unsecured loans are too expensive. Even then, should buy within (or better still, below) your financial means.

Anonymous said...

I once read an article in the papers about a licensed moneylender. He told the reporter that he earned about $15K per month from giving out a total of $1million in loans. That's a 18% return pa!

Anonymous said...

You mustn't forget about the bad debts that they have to shoulder though :)

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