Personal Loan Interest calculation
Generally, personal loan interest range from 4-10% annually.
Take note there might be additional charges like admin fee (also known as processing fee) – the fee for the bank to process and approved borrower’s personal loan. And also insurance fee – this charges is to pay bank for insurance coverage of your loan amount should it got mishandled (example: funds was transfer to wrong account)
Package 1:
Personal Loan interest rate: 5% annually
Maximum Personal Loan: 4 times monthly income
Personal Loan admin fee: 1.5%
Personal Loan insurance fee: 1.5%
Mr Tan monthly income is $2500 and took a $10,000 personal loan at an interest of 5%. He chooses repayment tenure of 5 years.
Yearly Interest = 5%
5 Years Interest = 5% x 5 years = 25%
Total interest paid to Bank A for 5 years = Total personal loan approved x total interest of loan tenure = $10,000 x 25% = $2500
Total Personal loan = $10,000
Total Interest Paid = $2500
Total Tenure = 5 years = 60 months
Monthly Installment = (Total personal loan approved + Total interest paid) / Total tenure = ($10,000 + $2500) / 60 = $208.33
However, take note that Mr Tan will not receive $10,000 upfront, as there are 1.5% admin fee and 1.5% insurance fee. Therefore,
1.5% admin fee on $10,000 = $150
1.5% insurance fee on $10,000 = $150
Mr Tan will only receive $9700 upfront ($10,000 – $150 admin fee – $150 insurance fee).
Personal Loan
Package 2:
Personal Loan interest rate: 8% annually
Maximum Personal Loan: 4 times monthly income
Personal Loan admin fee: Waived (no admin fee)
Personal Loan insurance fee: Waived (no insurance fee)
As per the above example, Mr Tan monthly income is $2500 and took a $10,000 personal loan at an interest of 8%. He chooses repayment tenure of 5 years.
Yearly Interest = 8%
5 Years Interest = 8% x 5 years = 40%
Total interest paid to Bank A for 5 years = Total personal loan approved x total interest of loan tenure = $10,000 x 40% = $4000
Total Personal loan = $10,000
Total Interest Paid = $4000
Total Tenure = 5 years = 60 months
Monthly Installment = (Total personal loan approved + Total interest paid) / Total tenure = ($10,000 + $4000) / 60 = $233.33
Compare Personal Loan package 1 and package 2:
Package 1:
Total interest paid + admin fee + insurance fee = $2500 + $150 + $150 = $2800
Package 2:
Total interest paid + admin fee + insurance fee = $4000 + $0 + $0 = $4000
Banks and financial institutions commonly use package 2 for marketing purposes as the admin fee and insurance fee are WAIVED!! However, by doing a detail calculation, package 1 is a much offer more savings despite the additional admin and insurance fee.
