The Difference between a Revolving Loan and a Term Loan
Why is that you will find loans that come with options of 1, 3, 5 or 7 year term with fixed installments while others don’t? It is simple, in Singapore; there are two types of loans. One of them is a revolving loan while the other one is a term loan.
Usually, a term loan is offering for a specify period of time. Normally 3 or 5 years and also comes with fixed installments throughout the repayment period. Payment for each installment includes the interest payments and principal payments. Since it less flexible when compared to revolving loans. Then you will also find out that the interest rates are also low.
On the other hand, a revolving loan normally issues as an overdraft or credit. You are usually allowing drawing money until a certain limit achieves and you will only pay for the interest rates as long as the line drawing. Once you have completed paying for the credit, you allow us to get more credit. Since this type of loan is very expensive to repay, with high-interest rates, it is advisable to take it only when it is very necessary
Bear in mind that unsolicited cheques and balance transfers sent to you by your bank are revolving credit that will normally tap on your credit card limits.
Applied Interest Rate vs Effective Interest Rate
Why is that there exists 2 interests is rates where one of them is almost double the other. Should you only take into consideration the higher one? This can be really confusing but we will iron it out.
The advertised interest rate (AIR) is the lower one and ranges from 6 to 15 percent per annum.
The EIR is actually the real cost of taking a loan. It is also known as the effective interest rate. It is established by making a determination on whether interest will be paid on the reducing balance as the loan goes down or whether it will be charged upfront on the whole amount. In case, you have a monthly rest calculation method. EIR will be equal to AIR since interest will be calculating on the basis of reducing the balance of the loan.
Normally, the EIR will take into account the frequency of your repayments and also whether installments will be payable in equal payments. It normally takes into account whether installments are in equal amounts and the frequency of the payments. For a loan to repay in 1 year or less, EIR will be higher if you will require to make a monthly period than when requiring to pay as a lump sum.
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