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What is EIR in Personal Loan and How to Calculate?

For sure you are familiar with the term interest rate, which is the amount which lenders charge in exchange of the assets they lent. It is often expressed as a percentage of the principal loan amount. But, have you heard of the term effective interest rate (EIR)? In this article learn all things about EIR. And, discover why everyone who has a loan or is planning to apply for one has to understand this concept.

Learn more about EIR so you can be better in deciding which moneylender to choose. Be an expert in finding out the best loan deals in Singapore.

What’s an Effective Interest Rate?

Effective interest rate (EIR) is the true cost of borrowing to a customer. It gives you a better idea of the total amount that a moneylender is charging you when taking a loan. If you only look at the interest rate advertised by credit companies, you can be deceived thinking that you only have to pay a small percentage. But, in reality, there are many other things you are charged with. EIR is an attempt to give you, the borrower a better idea on what these fees are and how much they cost you.

As mentioned above, the interest rate refers to the interest you get to pay. If a bank lent you $5000 and is charging you a 5% interest rate, you get to pay $250 for the entire year. But this is not the only payment you have to do. There is also an administrative fee or a processing fee.

Let’s say that the bank charged you $50 for the processing fee. This adds to your EIR. Aside from this, EIR also takes into consideration the repayment schedule, which could increase the amount you are charged with. There are three types of repayment schedule which are:

  • Number of instalments or tenure of the loan
  • Frequency of instalments
  • Whether the instalment amounts are equal or not

How Does the Repayment Schedule Affect EIR?

In simple terms, the more frequent repayments you have, the higher your EIR will be. For example, if your loan with 1 repayment has an EIR of 5%, the same loan with 12 repayments has an EIR of 9.49%. sRemember that the sooner you repay the loan amount, the less cash is left to you. This means then that you have to choose a loan with long loan terms and fewer repayments.

How to Calculate Your EIR?

It is possible that you can calculate the EIR of your own loan. Here is the formula followed by most banks:

[1 + (nominal interest rate / number of compounding periods) ^ (number of compounding periods)] – 1

But, to be honest, this formula can be difficult to follow. For one, banks have their own definition of what is a nominal interest rate or a compounding period. It is recommended then that you ask the bank how they compute the EIR of their offerings and then compare which of them has the most affordable deal. Remember that by law, financial institutions in Singapore must publicly release the EIR of their loans which means that as a borrower, you have the right to read the fine prints of the loan details including the EIR.

What’s a Good Effective Interest Rate on a Personal Loan?

Credit companies offer personal loans with different effective interest rates ranging from 7% to 25%. If you are lucky, you can find a lending company that could give you a 6% EIR if you have a high credit rating. In most cases, borrowers would choose an offer with the lowest EIR because they would mean that they are charged less in a span of a long period of time.

But for some borrowers, the effective interest rate is not the only factor to consider when taking a loan. For them, you must also think of loan tenure and your monthly income. A longer tenure might mean higher EIR, but it would also mean that you have more time to repay the amount you own. In the case of your monthly income, you have to make sure that your monthly income is enough to repay the monthly dues incurred by your loan.

Fees That Effective Interest Rates Don’t Factor In

In an ideal world, EIR should reflect the true cost of loans, but in the real world, there are still expenses not covered by the EIR. These fees are called circumstantial fees which means that not all borrowers have to pay them. Still, it is important to know what these are in case you are charged with these fees.

  • Early settlement charge – a penalty for paying the loan early. Take note that not all banks charge this.
  • Late charge – a penalty for paying tpast the due date. These usually cost $80. It is more common for banks to charge this than the early settlement charge.
  • Nonsufficient funds or returned cheque charges – a penalty incurred by a borrower who made a payment from an account without enough funds. If the payment transactions fail, the borrower is charged with the same amount as the fee.

Frequently Asked Questions (FAQs)

There is much to know about the effective interest rate and how it may affect your financial life. Here are some of the different questions you may ask about this topic. Remember that lending companies are using their own set of rules and regulations for each of the product or service they offer. Do not hesitate to contact your trusted bank and inquire about their rates.

• Do Personal Loans Help My Credit?

It depends. If you manage it well, like pay the due amount on time and pay it fully, your score or rating will increase. But, if you miss payments or decide to default or settle your loan with a debt relief company, your score will decrease. If you are not sure that you can manage the effective interest rate and other different charges you will be paying in your loan, it is best not to take it.

• How Can I Get a Low-interest Personal Loan?

In Singapore, the easiest way is to do this is to compare deals offered by financial institutions. Check who has the lowest EIR. You can also check the interest rates, the amount you can borrow, and the length of time you have to pay back. Assess if the interest rate used by the lender is lower than other competing lenders.

• How Can I Get the Lowest EIR?

Ask your bank or any lender about EIR of their loans. Do not rely on the advertised rates of their products. If you find their EIR, interest rates or other costs too high, you can negotiate with them directly. Remember that these are people behind these financial services.


Borrowing money can be a tough thing to do. There is so much information to read and understand. Aside from the effective interest rate, you must also be familiar with interest rates, nominal interests, lending costs and many others.

If you truly want to find the best deals for loans, you have to be vigilant in finding licensed moneylenders with reasonable charges. Aside from the advertised rates, ask the representative to calculate other additional costs. Also, compare if the product you are applying for will cost you least. You have to make sure that applying for personal or other types of loan is the best financial decision for you.

If you wish to know more about personal loans and other details about lending products in Singapore, visit Instant Loan now. They are a finance directory website that lets you receive free loan quotes from Singapore’s top licensed moneylenders.

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