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One of the greatest misconceptions about SME financing is the notion that taking on debt is always a bad thing.
Many people associate loans (aka. debt financing) with financial difficulties and cash flow problems and often assume that companies will only take up loans if they are in a poor cash position. However, this cannot be further from the truth.
Did you know that even large and established companies such as Apple still take on business loans? There are many advantages to debt financing that are often overlooked by SME-owners due to risk adversity or years of hearing misguided information.
This is the opportunity for you to uncover the perks of undertaking business loans (and the precautions you can take) so that you can clear your misconceptions and make an informed financing decision.
1. To Speed Up Business’ Expansion and Growth Rate
Common Myth: A healthy business always has excess cash on hand and will not require any form of business loans.
The truth is that excess cash may not always be a good thing, as it begets the question of “Why isn’t this excess funding being reinvested into new investment ideas and expansion opportunities?”
A healthy business will usually be seeking ways to speed up their rate of growth. Hence, it will often utilise excess cash to increase its capacity for growth (through upgrading equipment and machineries, increasing marketing efforts or expanding working capital). However, relying on cash-flows alone to finance growth is often insufficient for businesses and may cause them to take a longer time to reach its goals. Therefore, many successful SMEs choose to leverage on business loans to accelerate its expansion and growth, which is an opportunity you can consider for your business as well!
Possible Precautionary Actions: Create a revenue forecast based off existing balance sheets to ensure that your business will be profit-making on top of covering loan repayments.
2. To Avoid Cash-Flow Issues
Common Myth: Cash-flow problems are an inevitable reality for SMEs.
It is true that many SMEs struggle to maintain a positive cash-flow due to a multitude of reasons:
Freak Incidents i.e. Warehouse fire or natural disasters that may affect supply shipments.
Cyclical Business Downturns i.e. A restaurant chain may face business slowdowns in certain periods of a year, where their operating costs may be greater than that period’s revenue.
Poor business decisions/estimations or negligence of partners i.e. A firm overestimates its financial ability to follow through with a large project or subcontractors face financial problems due to the main contractor’s delayed payments.
These unexpected circumstances may cause an inevitable fall in period cash flows. But they can be easily remedied through undertaking business loans in advance, to allow cash to be set aside as a buffer against such circumstances. A stable and affordable line of credit also allows your business to continue operating as normal during cash-strapped periods. Generally, loans help prevent your overall business cash flows from being susceptible to uncontrollable situations and cyclical downturns.
Sometimes, there may arise unexpected opportunities for the business such as:
Discounted bulk orders of inventory
Retail space priced lower than market rate
Good deals on vehicles auctioned off by banks in a foreclosure
Having extra cash on hand or obtaining a business loan will allow your business to capitalise on these opportunities in time to potentially generate greater revenues. This is also important for businesses in capital-intensive industries such as manufacturing. They often need to spend large amounts on machinery, labour and inventory far before they start receiving any revenue from their projects. They risk having insufficient funds to complete the project if unexpected expenses are incurred midway through. A solution is to cover these heavy initial investments with short-term loans to leave the business with sufficient cash reserves.
Potential Precautionary Actions: Conduct a revenue forecast to estimate the true costs and profits generated from this investment. It will be helpful to determine the return on investment of the opportunity through weighing the cost of the loan against the potential revenue that can be generated. Basing decisions on hard number rather than gut instincts will prevent over-enthusiasm from clouding your judgment.
4. To Build Creditworthiness and Profit Off It
Do you know that taking on a loan can reap long-term benefits for your business?
When your business undertakes a loan, it establishes relationships in the financial sector and builds up lenders’ confidence through timely repayments. This is especially important for young SMEs that often find it difficult to qualify for larger loans when they lack a strong credit history to support its request.
Responsible debt financing will help to boost your business’ creditworthiness and business credit score. This may increase your chances of getting bigger loans in the future as your business grows.
The saying that the “bank is a place that will lend you money if you can prove that you don’t need it” also holds very true here. The best time to apply for a loan is the period where your business is financially strong, maintaining healthy cash flows and has a comprehensive business plan for future growth. It is wise to take advantage of periods with higher credit ratings to apply for loans, as banks and investors will perceive lower risk and issue a lower interest rate on the debt. SMEs can also re-invest excess cash in securities or instruments that repay a higher interest rate, profiting off the difference in interest rates.
Possible Precautionary Actions: SMEs should be cautious of taking on an early loan and ensure its ability to afford the loan as every late payment on a small loan may affect their qualification for future bigger funding.
5. Debt is Cheaper than Equity Financing
Common myth: Equity Financing is better for SMEs as investors will bear all risks and SME-owners will not be liable if the business fails.
Although equity financing has many upsides such as decreasing risk for SME-owners and allowing the business to have more cash and less debt, the truth is that its downsides are incredibly large.
Equity is an expensive financing method as it incurs a greater loss in the long-term. It requires you to give up a stake of your business in exchange for cash. Although 5%, 10% or even 15% may seem a reasonable percentage of equity to give up when your business is cash-strapped, it actually dilutes your ownership of your business. Ownership governs your control over management decisions affecting small decisions such as the hiring of workers as well as big decisions such as which projects to undertake. The general rule of thumb is that equity investors will seek to have a degree of authority over decisions made by the businesses they invest in, making it unwise to relinquish a large portion of your ownership over your company.
On the flip side, debt financing allows your current management to retain full control and does not dilute your ownership. It also has other advantages such as:
Tax benefits: Interest payments on loans are tax deductible and will decrease the amount of revenue that’s taxable. Comparatively, dividend payments to equity-holders are not tax deductible.
Lower obligations: As equity-holders risk losing all their investments if the business closes down, investors usually expect higher returns. Comparatively, business loans can usually be sourced at a lower interest rate.
Easier forecasting: Loan payments do not fluctuate as much as equity prices, making it easier to forecast expenses.
Possible Precautionary Actions: Too much of a good thing can be a bad thing. Although debt-financing is a good option for SMEs, it is important to not over-leverage and risk defaulting on loans. There is a significant amount of risk for the borrower if they lack confidence in loan repayments. Larger SMEs often use a combination of debt and equity financing to reduce the downsides of each method. You can find out more here onDebt vs Equity Crowdfunding.
In the past, SMEs often found it difficult to obtain a loan even if they recognised its advantages and are interested to undertake one. This usually occurs due to the long application period from traditional financial institutions and lack of business collateral or credit history to back its loan request. This is a common problem faced by SouthEast Asian SMEs that you can find out more about here on The SME Funding Gap in SouthEast Asia.
Fortunately, the proliferation of online financing platforms has led to more sources for SMEs to obtain loans from. One key option is Peer-to-Peer (P2P) loans that can be obtained through debt crowdfunding platforms such as Funding Societies in Singapore. This enables SME-owners to obtain loans much quicker — with simpler request procedures which can even be done through this popular business loan mobile app FS Bolt. You can find out more about Peer-to-Peer Loans here to make a more informed financing decision in the future!
By Funding Societies Funding Societies is the leading P2P lending platform for SMEs in Singapore and Southeast Asia. Established in 2015, they have funded up to S$579.54 million to SMEs to date. They are also licensed by the Monetary Authority of Singapore.
When it comes to dealing with the loss of a loved one, the last thing on your mind is paperwork.
When a loved one passes on, one of the first tasks handled by the family is to place an obituary in the papers.
Another task is attending to and filing deceased life insurance policy claims.
The information required for both is very similar. This led SPH, NTUC Income, and LumenLab (MetLife’s Asia innovation centre) to think about the applications of blockchain technology in helping automate and simplify life insurance claim processes for bereaved families.
This is where Lifechain comes in.
What is Lifechain?
Powered by blockchain technology, Lifechain automates the verification process by allowing SPH to securely encrypt and share verification data (used for obituary placement) with NTUC Income to kick-start the claim process.
This triggers a search for a matching life insurance policy, allowing Income to initiate the claims process should a match be found.
(L-R) Zia Zaman, CEO LumenLab and Chief Innovation Officer Asia; Julian Tan, SPH Chief of Digital Business; Peter Tay NTUC Income COO
Lifechain will begin piloting this month, targeting 1,000 randomly selected Income life insurance policyholders.
During the pilot, family members who place obituaries in The Straits Times will be informed about Lifechain. Upon their consent, the deceased’s National Registration Identity Card (NRIC) number will be submitted into Lifechain as hashed data, triggering a search for a matching life insurance policy.
When a match is found, SPH will inform family members within one working day, while Lifechain will send an automatic notification to NTUC Income to initiate the claims process.
Family members will also be informed by SPH when a match is not found, so that they can proceed to make checks and file claims with their life insurers accordingly.
The Potential of Blockchain to Shape the Future of Insurance
Lifechain is an industry-first collaboration to simplify life insurance claims for bereaved families.
With Lifechain, NTUC Income is able to simultaneously deliver improved efficiency for their customers while ensuring optimal protection of their policyholders’ personal data.
This is a milestone for Singapore’s insurance industry. “Blockchain technology offers greater transparency, enhanced security, improved traceability, efficiency and speed of transactions,” says Mr Peter Tay, Chief Operating Officer of NTUC Income, who heads Income’s Digital Transformation Office (DTO). “These value propositions resonate with NTUC Income and we are excited to be the first insurer to come on-board Lifechain.”
Mr Julian Tan, Chief of Digital Business of SPH, says he “hopes to expand Lifechain to include more insurers in time to come”.
If you’re facing a huge credit card debt, a balance transfer in Singapore can be your way out – but only if you use it carefully.
Debts from credit cards and other unsecured loans can be tricky to overcome, especially when the interest keeps piling in. But if you’re serious about paying off your loans, a balance transfer can be your way out.
Balance transfers in Singapore are usually advertised as 0% interest rate with the promise of getting extra cash. What are balance transfers, and is there any catch to the 0% interest rate?
This guide will explain to you what are balance transfers, how you can benefit from them, and what to look out for before getting one.
What is a Balance Transfer?
A balance transfer is similar to a short-term (3 to 12 months) 0% interest loan commonly offered on a credit card or credit line account.
As the name suggests, a balance transfer allows you to transfer all your outstanding balance to a low or 0% interest rate loan.
This means that you can avoid paying the high interest rate of 19 – 26% that would be charged to your credit card or credit line debts. This also lets you consolidate all your debts in one account.
Alternatively, a balance transfer can be a source of emergency funds. Singaporeans who have a large emergency expense can take advantage of the low or 0% interest rate if they can confidently repay the full amount within that grace period.
Since balance transfer is a service offered on top of a credit card or credit line, the bank will open either a new credit card or credit line account for you. Interest rates and fees may vary depending on which account you have:
BALANCE TRANSFERS ON CREDIT LINE ACCOUNTS (6 MONTHS)
1% of the transfer amount or S$50, whichever is higher
Citi Credit Card Balance Transfer*
1% of the transfer amount or S$50, whichever is higher
OCBC Credit Card Balance Transfer
3% of outstanding balance, or S$50 whichever is higher
* Citi Credit Card Balance Transfer welcome offer rate is only available to new Citi customers. # Offset the processing fee with up to $220 cash back, exclusively on SingSaver
5 Things to Note Before Using a Balance Transfer:
A balance transfer seems like the perfect solution for your credit card debt or emergency expense, but only if you use it responsibly. Below are things to pay attention to before applying for one:
1. Credit Limit
The credit limit of your balance transfers will be tied to your credit card or credit line account, with a maximum amount of 4x your monthly salary.
For example, if you have an existing credit card with a credit limit of S$12,000 and you charged S$2,000 to your card, the maximum amount you can borrow from your balance transfer account will be S$10,000.
2. Interest-Free Period and Processing Fees
Balance transfers usually have a 0% interest period lasting 3-months, 6-months, or 12-months. Instead of paying interest, there is a processing fee ranging from 1% to 5%, depending on the bank and tenor.
Standard Chartered Credit Card Funds Transfer is currently offering a welcome offer for new customers, with low processing fees of just 0.9%. For example, if you need a short-term loan of S$10,000, you would only have to pay S$90 in processing fees – which you can offset with up to $220 cash back if you apply via SingSaver!
3. Minimum Repayment Sum Per Month
Unlike a personal instalment loan, a balance transfer doesn’t require you to pay a fixed amount every month. It’s up to you to decide how much you can pay each month. However, you need to make sure you make the minimum payment each month, which can range from 1-3% of the remaining balance.
4. Late Payment Fees
At some banks, late payment fees will be charged if you are unable to make the minimum payment that is applied for either credit cards or credit lines. Late payment fees can be as high as S$60 – S$125, depending on the banks and credit facilities.
5. Interest Rates After the Interest-Free Period
If you still have a remaining balance by the time the interest-free period is up, the interest rates shoot up to 19% p.a. to 26% p.a. – the interest rates you can typically find on credit cards or credit lines.
Always Pay Off the Full Amount During the Interest-Free Period
Your balance transfer credit card or credit line account allows you to borrow more. However, never use it for anything else other than paying off your balance transfer. You may end up paying a lot more once the grace period ends and the prevailing high-interest rate kicks in.
To take full advantage of balance transfer facility, always check if you are able to pay off the entire amount borrowed within the interest-free period. If you are not able to pay off, the interest that will be charged will go as high as 26% p.a. This brings you right back to where you started.
Secondly, make sure that you can afford to pay the minimum amount, which is about 1-3% of the transfer amount. Should you miss that payment, you will have to pay a late payment fee, making the 0% interest period useless.
By Lauren Dado Lauren has been a content strategist and digital marketer since 2007. She edits and publishes personal finance stories to help Singaporeans save money. Her work has appeared in publications like Her World, Asia One, and Women’s Weekly.
When I turned 40 last year, it suddenly felt as though I was running out of time in life.
I started wondering why I am running on a treadmill that no longer excites me (I used to love my job!).
A rich life with less stuff | The Minimalists | TEDxWhitefish - YouTube
I came across a video shared by SGYI and decided then to do a mini-retirement test drive to see how well I could survive living on my monthly passive income, practising a minimalist life, and working on things that truly excites me.
Here are some highlights/lessons learnt from this mini-retirement test drive:
Your colleagues and friends think that you are crazy when you retire too young.
You will constantly be bombarded by friends/colleagues/headhunters who want to push you back to the treadmill again. It is difficult to resist the temptations.
Your friends who have never treated you before started buying you drinks and meals.
Your friends stop inviting you to join them for vacations because they feel anxious that you are spending money without a job.
You keep getting questions in terms of how you spend your free time.
You need to set aside a decent set of emergency funds as your income is now not as consistent as your monthly salary. The passive income varies across different months thus you need to be more prudent in the way you plan your spendings.
You should still adhere to a saving and investment pattern with the passive income you receive.
You realise that you don’t really need that much money to survive. In fact, you save more without having to try too hard because you have more time thus you tend to eat more healthy or less, you have time to take public transport and you no longer crave for “stuff/things” to relieve you from the stress you derived from work. You can live decently and comfortably with just 2.7 K SGD per month.
Food – approx. 500 SGD per month
Transport – approx. 250 SGD per month
Utilities such as mobile, cable, water, electricity – approx. 250 SGD per month
Misc / Savings – 200 SGD per month
Parents Allowance – 1.5 K SGD per month
You may easily lose count of days, weekends and public holidays.
You need more discipline as you can get caught up with idleness as you have so much time in your hands. There’s always the temptation to push things till tomorrow. Thus, you should still set goals for yourself else you may eventually lose the purpose in life and maybe even self-identity as the years go by. Imagine you have another 40 years to go!
You won’t get bored as there are so many things that can keep you preoccupied. Whether these things can make you feel fulfilled is another story.
Your travel experience can be more meaningful as you no longer have a schedule you need to keep up with nor a set of responsibilities that occupy your mind during your travel.
It broadens your perspective and gives you inspiration in terms of how others live their lives and make a living differently as you start connecting with networks outside your comfort zone or norm.
Less clutter makes life more simple, with less chores. It allows you to focus on things that truly matter.
You become more healthy as you are more conscious about what you eat and how your body reacts to them.
Waking up naturally every day is a beautiful experience and in fact, should have been a human right.
You start having a glow without having to slap on those expensive beauty creams.
You start building more genuine relationships as there are no more agenda. People with an agenda slip away by themselves.
Technologies like Facebook, Whatsapp and Line keep you connected thus you won’t feel lonely and disconnected but you have to be conscious not to spam your friends who are still running on the treadmill.
Get your LinkedIn and recommendations updated so that if you decide to go back to the treadmill after a few years, you still have the credentials with you.
Now I understand why the very rich never seemed to be able to stop working. Living an intentional but purposeful life is extremely important to a person’s well being in any phase of one’s life. I have since started on an exciting project…
(1) If your card doesn’t support contactless payments (like OCBC VOYAGE), you can digitize your card by adding it to your mobile wallet (eg Apple Wallet, Google Pay, Samsung Pay), and use that to tap into the gantry.
(2) DBS Visa cards which expire between May 2019 and April 2020 are not enabled for public transport fare payment. Neither are UOB Visa cards with an expiry date before April 2020. You can request replacement cards from your bank, or simply digitize your card as in (1)
(3) For now, SCB supplementary cardholders cannot use SimplyGo unless they digitize their cards
(4) Citibank cards are missing from the table above. That’s because Citi has explicitly stated that SimplyGo transactions will not earn any rewards, be it miles, points or cashback. That’s a bummer, and I can’t figure out why they’d do that, but it is what it is.
(5) To earn miles and points from SimplyGo transactions, tap your card (or mobile phone) at the gantry to enter. Topping up your CEPAS compliant cards via GTM machines will not earn you any points, notwithstanding the fact they accept credit cards.
UOB awards UNI$ in blocks of $5, so any spending below $5 does not earn any points. This means if you’re using the UOB PRVI Miles Visa and your daily public transport bill is $4.99, you earn nothing at all. In contrast, if you used your UOB PRVI Miles Mastercard, you’d still be ok so long as you spend at least $5 over 5 days (which isn’t difficult).
This quirk is unique to UOB, so you’ll be fine with any other Visa card.
These promotions are likely to be used up quickly, so hop on while you still can!
Even if you have an epic daily commute, it’s unlikely that you’ll be jetting off to Paris on SIA Suites, thanks to miles from SimplyGo alone. That said, every little bit helps, and there’s no reason why you shouldn’t be earning miles or cashback from public transport rides too.
Back in the day, if you had a problem at home with the lights, the plumbing, the kitchen stove, the aircon, moving large furniture, who would you call?
Chances are it involved asking your dad or long-lost uncles if they had any good “lobang” or fix-it-all handymen who just knew their way around the house.
But relying on good ol’ word-of-mouth has its downsides.
You rely on the same old contacts, even though they may not be specialists, or may not be the right people for the job for the price you pay. You’re also limited by your own network or there might be a communication breakdown (many of these old-time handymen speak only dialect).
Enter Ovvy, a mobile app aimed at linking professional home services providers like electricians, plumbers, home movers, cleaners and aircon technicians to the open and online market.
Ovvy allows anyone on their app to source for these service providers, read unbiased reviews and bid for these services. An escrow account ensures the money is only released when both you and the merchant are satisfied with the experience after the service has been satisfactorily completed.
Users can leave reviews of their experience on the profile of each service provider
The idea of renting, lending, swapping and co-sharing goods and services in a sharing economy is gaining momentum. Witness the rise of services like car-sharing app BlueSG, home rental app Airbnb, and P2P sharing or renting services like MyRent and Style Theory.
Beattie, a former S-League football player turned serial entrepreneur, said his platform plugs into the whole sharing economy eco-system.
“On a daily basis, someone in Singapore is likely to use something from the sharing economy. There’s transport, food, and other services and the possibilities are endless.”
“These days, a lot of people are inclined to work on their own terms. They don’t have to be assessed or judged by someone from above. They work when they want, as much as they want and they are empowered in a way that the corporate structure limits them,” said the 32-year-old Englishman from East Yorkshire.
A former midfielder with Hougang United FC and SAFFC,Beattie’s journeyman football career came to an abrupt halt when he suffered a sickening clash of heads during an S-League game against Geylang in 2015. He woke up in hospital with two fractured and compressed eye sockets and a broken cheek, forehead, nose and brain bleed.
After turning out for football clubs in Canada, Norway, Australia, Scotland and Albania, the collision permanently put him off football and forced him to evaluate his career. He called the accident his “beautiful nightmare” because it proved to be a blessing in disguise.
Inquisitive and active by nature, Beattie says he plunged into entrepreneurship because he’s constantly trying to problem-solve on a daily basis.
“I’m always in this space of analysing. How can I make this better? Faster? How can I streamline technologies to it?”
Apart from Ovvy, Beattie has either invested or started 10 other businesses that range from tech ventures like Chow and web design service Roque Press. Beattie also launched a custom-built hygiene solution product registered in Singapore early this year. His team raised a significant US$250,000 for this project that distributes these hygiene units to hotels, schools, gyms and condominiums.
Making and coping with the switch
Making the switch from full-time athlete to entrepreneur also came with some hard-knock money lessons.
“Being a full-time startup entrepreneur means living in a more sustainable way because you don’t know when your business starts generating revenue,” said Beattie, who says start-up life is a 24-7 job.
“But it does come with its perks, such as deep and long-lasting friendships,” says Beattie, who was on CLEO’s list of Most Eligible Bachelors in 2019. Many of his business partners are now his friends because they share the same values and approach to life.
Beattie in his football playing days under Hougang United FC
“I like to take an idea, marinate on it as I develop it while asking around. Sport for me has always been a vehicle to explore these ideas,” said Beattie, who makes use of the discipline he picked up from the sport to shape his business mentality, while tapping on his athlete network to bring his ideas to fruition.
“Being an entrepreneur can be quite lonely at times. There are many things you have to do solo, and you can’t schedule things ahead of time because work is a priority.”
“It’s like trying to grow into a different style of living. It’s evolved, with constant pressure.”
But Beattie feels hard work and nonstop hustle is all worth it in the end, for all that he’s gained–– a hunger for success and the constant pursuit to realise bigger and better goals.
His top tip for those keen to be an entrepreneur themselves?
“Associate and meet people of different demographics and age, religion, race. If you’re always around the same groups, you’ll stay the same. A large part of who you are is influenced by who you associate with.”
“Be around people who think differently and have different experiences. And try and learn from that– through others’ eyes.”
By Geraldine Mark Geraldine has always been a mixed bag by nature. To her advantage, she has learnt how to identify connections across disparate subjects. Her interests include food and fitness. She also likes the smell of hot coffee, fried bacon and freshly-laundered clothes, in no particular order.
For most executives, Grab has become the go-to app for their day-to-day transport needs, payment solution and even food delivery services.
Because it is so widely used, most companies have included Grab for transport reimbursement programmes.
But, reality bites when users realise what this entails –– painfully documenting every ride and retaining the physical proof of the journey until it’s time to close the account books again.
Enter Grab for Business, a solution to dispel the end-month flurry as you’re scurrying for receipts to make your transport claims.
1. Claims, claims but no receipt?!
Gone are the days when you get anxious about losing paper receipts needed to make claims. With Grab for Business, tag your rides as “Business” when you book a Grab to begin your claims process. It’s a simple toggle that you turn on with each ride, one that shortens your claims processes immensely.
Simply tag your ride as “Business”
No need to worry about saving digital receipts on your phone, or sorting through your emails when it comes to monthly expenditure claims.
Grab will automatically email you a monthly consolidated statement of work-related rides at the end of each month which you can file as expense claims. The statement will include the date and time of booking, location pick-up and drop-off, as well as the price of the ride.
Example of a Grab For Business monthly statement
The best part? Grab for Business can be synchronised with common travel expense platforms such as Concur, Expensify and Chrome River.
2. Kon-mari your wallet and go green
Who wants a wallet chockful of old, tattered receipts? Declutter your life with Grab for Business, and go green at the same time.
When you Grab for Business, you don’t just go paperless. There’s no need to ask the taxi uncle “Can I have a receipt?”, especially if you’re in a foreign country and are unable to speak the local language.
Your rides are also automatically tracked in one single app and with all receipts stored digitally, you’ll never have to worry about misplacing one.
3. Safe and reliable business travel overseas
Off for a week-long business trip in Southeast Asia? With Grab for Business, employees who need reliable, fast transport to meetings or airport transfers to and from hotels now have a safe and hassle-free option. Say goodbye to getting ripped off because you are a foreigner, don’t speak the language, or are not aware of which are the “unreliable” taxi companies.
Why wait for Grab promotional codes and special offers when you can make the most out of every ride with this programme? And, with the time and money saved, you can focus on boosting your productivity in and out of work without stress.
Sometimes, it takes a little help to achieve the lifestyle we aspire to.
When considering a personal loan or credit line to reach that goal, it can be hard to decipher the ways interest rates are calculated.
You’re likely to see three ways banks calculate personal loans interest rates — the flat rate method, a reducing balance method, and the rule of 78.
What is the difference, and which method works best for your needs?
The Flat Rate Method (FRM)
First is the FRM, where the same interest rate will be applied throughout your repayment period. This is typically calculated with this formula:
Interest Payable Per Instalment = (Original Loan Amount x Number Of Years x Interest Rate Per Annum) ÷ Number Of Instalments
The benefit of this process is simplicity. The interest amount will be the same throughout the repayment period, making it easy to automate monthly payments.
So for example, if you wanted to borrow $6,000 at a flat rate of 7% over 12 months, and paid monthly instalments, the calculation would look like this:
Interest Payable per Instalment = ($6,000 x 1 x 7%) ÷ (1*12) = $35 per month in interest
Total interest paid on loan over 12 months = $35 x 12 = $420
Reducing Balance Method (RBM)
The other method is the RBM. Instead of charging a fixed interest amount based on the original loan amount, this method calculates interest payments based on the outstanding principal balance. If you’re making monthly payments, this means the effective interest rate will be different every month.
The only formula you need to know what your monthly payable interest is:
Interest Payable per instalment = Effective interest rate per instalment x Outstanding loan amount
Take note that the monthly effective interest rate per month differs from the advertised interest rate. 7% interest rate is the advertised interest rate, but the effective interest rates also take into account processing fees and the changing interest rates based on the outstanding loan amount.
The table below compares the difference paid between FRM and RBM for a $6,000 loan with 7% interest rate over a 12-month tenure.
Month (within year 1)
Principal Payment ($)
Remaining Balance ($)
Interest Payment (FRM) ($)
Interest Payment (RBM) ($)
*Actual interest payment and monthly repayment amount may differ due to rounding.
This method rewards users who repay a larger sum of their loan upfront. With the bulk of the interest paid within the first few months, the faster you pay off as much as you can of the loan, the lower the total amount of interest payable. Contrast this with the flat-rate approach, where your interest rate stays constant no matter what.
Choosing the reducing balance method means you pay less interest on your loan but it is not an option offered by many banks. Bank of China’s $martLoan, which borrows off the BOC MoneyPlus Line of Credit, and $martCash, which borrows off the BOC credit card, uses this reducing balance method to help customers with interest savings. Coupled with one of the lowest interest rates and tenures on the market, customers can use this loan option to suit their own needs and payment ability.
Rule of 78
Similar to the RBM, this method starts off with higher interest payments at the beginning of the tenure. But instead of taking the outstanding loan into account, the interest payments are fixed on weighted tiers, with the total adding up to the same interest amount as the FRM.
But how are the tiers determined? The clue comes from its name: 78 is the sum of each number from 1 to 12:
For a one-year loan, each interest payment would be weighted against this scale, starting from 12. So the first interest payment would be 12/78 of the total interest payment, the second would be 11/78 of the total interest payment, and so on.
Month (within year 1)
Interest Payment (FRM) ($)
Interest Payment (Ro78) ($)
Interest Payment (RBM)
*Actual interest payment and monthly repayment amount may differ due to rounding.
The weight of each interest payment is adjusted according to the number of months in the tenure. For instance, the first month of a 2-year loan would be 24/300 of the total interest payment, 23/300 the next and so on.
This method is not ideal for longer tenures, and as such is only available in shorter loans like the BOC Term Loan.
Though both the Rule of 78 and RBM has reducing interest rates, it’s clear to see that the RBM still has lower total interest payments overall. The Rule of 78 would also be undesirable if you choose to cancel your loan early. In the example above, the borrower already pays double the amount of the RBM and the FRM within the first month. By the fourth month, you would have already paid more than half the total interest amount.
At the end of the day
Understanding how a personal loan is calculated can be a tricky business, so it is important to take the time to clarify those calculations with your trusted financial advisor for clarifications.
Personal loans can seem difficult to understand because of the calculations involved. But once you understand the basics, it can bring you greater savings and open doors to greater opportunities.
Enjoy the life you desire with BOC $martLoan that offers you a fixed monthly repayment period of up to 7 years. With just S$6 a day, you can get extra cash of S$10,000.
What’s more, get exclusive rates when you apply with SingSaver.
Staying debt-free is ideal but in Singapore, not realistically possible.
Unless you’re lucky to have millions stashed away, buying a home for most people will involve getting a bank loan.
The trick is learning to manage an acceptable level of debt. We share 5 easy steps for you to follow if you’ve got a mounting level of debt or are aiming to get your credit score cleaned up.
Step One: Check Your Credit Score
What is a credit score? It’s a rating for banks to assess you as a candidate for loans. When you apply for loans above $500, most banks will use your credit score to determine how much they are willing to lend you. It’s how banks determine your likelihood of defaulting on loan repayments. A healthy credit score improves your chances of getting a higher loan for a car, house, education or to start a business.
Grades ranges from AA to HH. The highest possible credit score risk grade is AA.
Repayment status may affect your risk grade. Repayment history of B or C means you have history of delinquency or late repayments. Repayment history of D and below are usually the result of loan defaults, where the bank had to write off your loan. If you have bad credit, you risk getting a smaller loan or having your loan rejected.
Singaporeans can check their credit score by obtaining a credit report at the Credit Bureau of Singapore (CBS) for a fee of $6. It’s important to keep your credit score as close to AA as possible.
Contrary to popular belief, not all debt is bad. Good debts are investments with returns beyond the monetary value of the debt and its repayments. Generally, property and assets such as stocks, bonds and gold are considered good debt. Some may consider financial loans for education as good debt too, as the value of education can boost future earning power which makes the debt worth it.
Bad debt, on the other hand, is sunk cost with no other opportunity to generate valuable returns. Incurring bad debts means you risk lowering your credit score, especially if you find yourself unable to pay them off.
Another thing to bear in mind is the new MAS borrowing limit. From June 2019, the revised limitation means the maximum borrowing limit, or the total amount of outstanding unsecured credit is 12 times your monthly income — down from 18 times. This limit stands even if you have not maxed out your total credit limit across existing credit facilities.
Step Three: Create A Plan Of Action
It’s not easy to pay off debt in full all at once. Setting up a debt repayment plan may make it easier for you to tackle this considerable financial burden in a sustained and manageable way.
Start by making a list of your debts and rank them according to the order you want to clear them. One recommended way is to pay off the smallest debts first before moving onto the larger ones so you gain momentum in debt-clearing. Another way is to prioritize debts from the highest to lowest interest rates incurred and tackle them accordingly.
Another solution is to tackle one debt at a time so you don’t feel overwhelmed. Doing so prevents you from paying more in clearing your debt since you pay less interest over time instead of spreading your dollars over several debts at once.
Step Four: Consider A DCP
When your debt is more than 12 times your monthly income, a debt consolidation plan comes in handy by helping you easily manage multiple debts.
A debt consolidation plan is a government-approved scheme offered by all leading banks in Singapore. The plan consolidates all your unsecured credit loans into one so you no longer have to keep track of separate loans from various banks. This streamlines the debt repayment process while relieving you of the high interest in repayments from various facilities. Bank of China’s (BOC) Debt Consolidation Plan (DCP) has one of the lowest interest rates in the market and allows for a loan tenure for as long as 10 years.
Upon approval for a DCP, BOC will settle all your outstanding amounts with various financial institutions and notify them to suspend all your accounts.
The best part? Successful applicants get a complimentary BOC Family credit card upon DCP approval, with the annual fee permanently waived during your BOC DCP tenure. Without any other credit account to rely on in case of emergencies, BOC’s credit card will offer much-needed support for you to manage your expenses.
Taking up BOC’s DCP is one way you can breathe easy with your finances, especially if you’re struggling to settle multiple outstanding debts.
Step Five: Sustainability Is Key
Be realistic, and start cultivating good money habits like always paying your credit card bills in full and on time. Unless you do this, unhealthy money habits will drag you into a vicious cycle of creating more debt time and again. Managing debts is a learning process, so don’t be too discouraged if your debts look like they’ll take forever to clear.
With the right mindset and a plan of action, you can chip away at the outstanding amount that you owe. After your debts are cleared, channel the repayment funds to a savings account with a high-interest rate so you have an emergency rainy day fund.
If you need a little help managing your debt, take the first step with BOC’s DCP. What’s more, enjoy exclusive rates when you apply for BOC’s DCP with SingSaver now.
There are many reasons why you would apply for a personal loan – and they don’t always have to be because you’re in some form of crisis.
When used properly, personal loans are a great way to manage your personal cash flow, especially during life’s biggest milestones such as renovating your home, furthering your education, or taking that bucket list trip you’ve always dreamed of before settling down.
As with any financial product, using a personal loan to your best benefit requires going in with both eyes open, and discipline and commitment to paying off your debt.
Here are some DOs and DON’Ts to take note of so you can make the most of your personal loan.
DO know why you are getting the personal loan
Your reason for getting a loan would determine the necessity of taking it up and your ability to repay it.
There are two main reasons to get a loan: to invest or to get out of debt.
Investing could come in the form of actual investing, or in the form of getting an education or renovating your home. Personal loans in these cases make perfect sense because your expected return would cover your loan amount.
Using a personal loan to get out of debt may seem counter-intuitive, but it’s actually not – most unsecured debt is placed on credit cards, which have an average interest rate of 25% p.a. Personal loans have an average interest of only 6% p.a., making it a far more manageable alternative to credit card debt.
The idea is to borrow a little to prevent a larger debt down the road.
DO shop for the lowest interest rates
Getting a personal loan just because you can is not a good thing. Make sure you can commit to the repayment schedule and get the best loan with the lowest interest rates.
A small difference in interest rates can save you hundreds, if not thousands, of dollars depending on your loan amount and tenure.
Say you need to borrow $20,000 to be paid back over 3 years.
If you choose a bank that is currently offering 5.8% interest p.a., your total loan repayment (inclusive of interest) will amount to $23,472.
Alternatively, if you had chosen a bank with only 3.7% interest p.a., your total loan repayment (inclusive of interest) would have been only $22,212.
That is $1,260 that you could have saved on interest alone, simply by comparing interest rates first.
It’s not just the interest rates that matter. Read up on required repayment schedule, maximum loan tenor, any income inhibitions, and importantly – how long it may take to have your loan approved.
Also, be sure to check for any additional administrative or disbursement fees. Some loans offer low advertised interest rates but make up for it in high administrative fees. This is why it is always better to look at the Effective Interest Rate (EIR) rather than the advertised interest rate.
DO make full use of existing promotions
Make use of exclusive offers by applying on an aggregator, which may give you exclusive rates that are not available on (and sometimes better than) the bank’s own website.
In addition to exclusive rates, aggregators also often throw in sweeteners like additional welcome gifts (like cash or cash vouchers). All these are great ways for you to get the most value out of your personal loan.
Before taking out a personal loan, use our personal loan calculator to see what your expected monthly repayment will be. Do you believe you’ll be able to keep up with these amounts? If not, consider extending your loan tenor or reducing your loan amount.
DON’T use personal loans for non-essential spending
Personal loans are easy to apply for, and their relatively low interest rates make them a useful and manageable financial tool for many Singaporeans.
However, your eligibility for a personal loan should not be the only reason you’re applying for one. Personal loans should not be taken on a whim or be used to fuel excessive leisure spending.
Whatever your decision…
It’s important to know your financial needs and saving habits before taking up a loan. While personal loans can help bridge the gap to fulfill your needs, it is also a monetary commitment.
If you’ve decided that a personal loan is the best thing for you right now, consider HSBC’s personal loan. It has one of the lowest interest rates in the market at only 3.7% p.a. (EIR 7% p.a.), no processing fees, and a long loan tenor of up to 7 years so you can repay your loan at a more comfortable pace.