Explaining A Flat Rate Loan

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Read the full article at http://www.icompareloan.com/resources/explaining-a-flat-rate-loan/

Read the full article at http://www.icompareloan.com/resources/explaining-a-flat-rate-loan/

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  • 1. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Explaining a Flat-rate Loan
  • 2. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Furnishing Loan Financing institutions (FIs) in Singapore generally offer these loans with tenure ranging from one to five years. As this duration is considered relatively short, the FIs usually offer these loans on flat- rate basis. Some banks may also offer them on monthly-rest basis.
  • 3. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance What is a flat-rate loan? It is a loan in which total interest payment is determined at the beginning of the loan based on the total principle. The effective interest on a flat rate is higher than a loan based on periodic-rest, all else equal.
  • 4. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Example We will use the below loan details to understand the payment for a flat-rate loan. Loan Quantum = S$20,000 Loan Tenure = 3 years Interest Rate = 10% p.a.
  • 5. TotalInterest= PrincipalxTermof LoanInYearsxNominalInterestRate p.a. TotalInterest=$20,000x3x10%=$6,000 TotalPayment= Principal+Total Interest TotalPayment=$26,000 Instalment= Principalx(1+Termof LoanInYearsxNominalInterestRate p.a.) TotalNumberof PaymentPeriods
  • 6. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance The installment in each period = the Total Payment / the number of payment periods. Most loans are serviced monthly. So, the number of payment periods = 12 x 3 = 36. The monthly installment = $26,000 / 36 = $722.22
  • 7. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Sometimes flat-rate loans can be repaid: • Quarterly • Semi-annually • Annually The total number of payment periods = Term of Loan in Years x Payment Frequency Per Year
  • 8. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Most loans are serviced monthly So, the number of payment periods = 12 x 3 = 36. The monthly installment = $26,000 / 36 = $722.22
  • 9. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Finding the interest rate on a flat-rate loan We will move onto learning: • The computation of the ENR per annum • Effective interest rate per annum.
  • 10. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance To compare the true cost among various loan types, we need to standardize the interest rates. This is where the ENR (equivalent nominal rate) per annum and effective interest rate per annum come in. Loans come in different types, for example a flat rate versus a periodic-rest Within the same type there can be differences in the annual payment frequency or the mode of payment (annuity-immediate versus annuity-due)
  • 11. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Here, we assume the case of annuity-immediate Using the same example: Loan Quantum = S$20,000 Loan Tenure = 3 years Interest Rate = 10% p.a. This time round instead of having only monthly repayments, we will have quarterly, semi-annual and annual as well.
  • 12. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Table 1 Payment Per Period ($) Total Number of Payment PeriodsPayment Frequency Per Year 722.2236Monthly 2,166.6712Quarterly 4,333.336Semi-annual 8,666.673Annual
  • 13. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance How do we then find their ENR? The Excel syntax to be used to find ENR.
  • 14. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Table 2: Excel Syntax for ENR Syntax =12* RATE (36, 722.22, -20000)Monthly =4* RATE (12, 2166.67, -20000)Quarterly =2* RATE (6, 4333.33, -20000)Semi-annual =1* RATE (3, 8666.67, -20000)Annual
  • 15. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance We will use ENR as the nominal rate in the computation of the effective interest rate So the effective rates Effective Rates (%) 19.46Monthly 18.28Quarterly 16.76Semi-annual 14.36Annual Table 3
  • 16. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance The relation between the true cost of the flat-rate loan and the payment frequency The more frequent are the payments the higher the cost is. This has to do with the fact that total interest payment has been decided right from the start; therefore the more frequent the repayments are the less liquidity you have. Seen in another way, it has something to do with the time value of money. $1 pays today costs more than $1 pays a year later
  • 17. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Click HERE for the Excel spreadsheet to compute the payment and effective rate for the flat-rate loan.
  • 18. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance About Property Buyer Mortgage Consultants Property Buyer Mortgage Consultants is a research focused independent mortgage broker. We emphasize a consultative approach where we match our client’s financial situation with the best fit mortgage loan, not simply a cheap loan. We also help property buyers in their buying process helping them avoid pitfalls from unscrupulous property agents. (We are not property agents, therefore there is no conflict of interests.) We also developed our proprietary home loan reporting tool which provides amongst other things, 23 years Sibor history as well as 6 years worth of SOR. Our service is free to you as banks pay us a commission on loan deals completed. Banks in turn save on staffing cost as we are not on their payroll. www.PropertyBuyer.com.sg/mortgage www.SingaporeHomeLoan.net www.iCompareLoan.com/consultant/