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Before
you decide on a loan for yourself, you should be clear about
the expenses that you will incur in getting and servicing
the loan. Banks and finance houses provide Customer Information
Sheets which you can use to compare between various loan packages.
You should
clarify how the interest expense is charged, whether it is
fixed or variable and how the repayment scheme works. How
the rates are calculated will affect the actual amount you
end up paying to the bank. Annual-rest basis and monthly-rest
basis are the most common-types of periodic-rest loans, where
interest is charged on the principle at the beginning of the
period, for the whole period. Interest is often charged on
a flat-rate basis for short-term loans like renovation loans
and car loans. In this case, interest is charged on the original
principal for the whole term of the loan.
The cheapest
loan is not necessarily the one with the lowest interest rate
as the term of the loan and how interest rates are calculated
affect the nominal rate of interest and the real cost of the
loan. For example, a loan with a lower interest rate on an
annual-rest basis may turn out to be more expensive than a
loan with a higher interest rate on a monthly-rest basis for
the same term period, and vice-versa. Hence, it is very important
to compare different loans with different repayment schedules
on the same cost basis - one way of which is by comparing
the equivalent nominal rate of interest (EMR) on monthly-rest
basis.
Note the
other charges that may be imposed, which may be fixed or tied
to the loan amount:
| Facility/processing
fee |
Fee
charged for processing the application |
| Amendment
fee |
Fee
charged everytime an amendment is made to the original
application |
| Cancellation
fee |
Fee
charged for initially accepting a loan offer but later
turning it down |
| Late
payment fee |
Fee
charged when late payment is made, in part of full redemption,
ahead of loan payment schedule |
| Default
fee |
Fee
charged when repayments are not made. The bank would at
this point call in the loan and demand full repayment
of amount |
Finally,
though most banks offer similar products, there may be differences,
so be sure to read the fine print and to check what other
third party charges there are besides the ones listed above.
For instance, housing loans have stamp duty, legal fee, valuation
fee and insurance premium.
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