A note consists of 3 main components: the principal amount, the interest rate and the number of months for repayment. There are many types of interest rate calculations. The two most common types are simple interest rate and effective interest rate.

As the name suggests, simple interest rate is meant to be intuitive and easy to understand. Hence it is the interest rate of choice at Funding Societies, so that everyone knows the actual returns they can expect from each investment.

Simple interest rate per year = Interest / Principal / Repayment Months * 12

Example:

For a 6-month note of S$ 100,000 repaid monthly, with total interests of S$ 5,000

Simple interest rate per year = S$ 5,000/ S$ 100,000/ 6 * 12 = 10%

Effective interest rate is the real return on the investment when the effects of compounding over time are taken into account. While Funding Societies will present the effective interest rate in the factsheet, Simple Interest is still the preferred rate of choice at Funding Societies.

P=Principal

I=Annualised interest rate

n=Tenor

Service Fee - I x 18%

Effective Interest Payment = P x I x n x (1-18%)

Total Repayment = P + I - service Fee

EIR after fees=(Total Repayment/P)1/n−1