Learn how to calculate the Effective Interest Rate (EIR) on personal loans in Singapore. Find out what EIR means, why it matters, and how it affects your loan costs.
When choosing a personal loan in Singapore, most borrowers focus on the advertised interest rate. But what if we told you that is not the true cost of your loan?
The Effective Interest Rate (EIR) provides a more accurate picture of how much your loan actually costs, taking into account fees, processing charges, and your repayment schedule. Whether you are comparing the best personal loan in Singapore or trying to understand your loan eligibility, knowing how to calculate EIR is crucial.
This guide breaks down what the Effective Interest Rate (EIR) is, why it matters, and how it differs from the advertised interest rate.
What is Effective Interest Rate (EIR)?
The Effective Interest Rate (EIR) is the true cost of borrowing, expressed as an annual percentage. It shows how much you are really paying for a loan once all the additional charges and repayment structures are factored in.
Unlike the flat interest rate, which only calculates the basic interest based on your original loan amount, the Effective Interest Rate (EIR) takes into account a fuller picture of your borrowing costs. EIR includes additional components such as processing fees, your monthly repayment schedule, the total loan amount, and the loan tenure. These factors can significantly impact how much you end up paying over time.
In simple terms: EIR = what you actually pay.
What Every Borrower in Singapore Should Know
When applying for a personal loan in Singapore, it is easy to be swayed by low advertised interest rates. However, what many borrowers do not realise is that these “advertised rates” often exclude extra fees and charges. That is why the Monetary Authority of Singapore (MAS) requires all banks to display the Effective Interest Rate (EIR). This regulation helps borrowers compare low interest personal loans more accurately based on your loan eligibility in Singapore.
EIR vs Advertised Interest Rate: What Is the Difference?
At first glance, the advertised interest rate might seem appealing, it is simple, straightforward, and often advertised as “xx.xx% p.a.“. However, this figure only accounts for the interest charged on the original loan amount, without factoring in how you actually repay the loan over time.
For example, while a bank may promote a flat advertised rate of 3.5% p.a., the actual EIR, which reflects what you are really paying each year after accounting for fees and monthly repayments, could be as high as 6.5%. That is nearly double the advertised rate. Other factors, such as your credit bureau profile, may also lead to higher interest rates.
This difference matters because many borrowers underestimate the real cost of their loans, thinking they are getting a better deal than they actually are. By paying attention to the EIR instead of just the flat rate, you can compare personal loans more accurately and avoid unpleasant surprises down the line.
How to Calculate EIR on a Personal Loan?
In Singapore, a lot of people see the advertised low interest rate and think they are getting a good deal. The problem is, many people either miss out on checking the EIR, or not sure how to calculate it.
The formula for calculating EIR would be as follows:
EIR = (1 + r/n)^n – 1
Where r is the annual interest rate, and n is the number of compounding periods.
For instance, if you take out a loan for $1,000 with 12 monthly instalments at a 4% annual interest rate.. To calculate your EIR, you first divide the annual interest by 12 to get 0.003333%. You then plug this figure into the formula above:
EIR = (1 + 0.04%/12)^12 – 1 = 4.07%
This means that in total, you will be paying back $1,040.75 over the course of your loan, resulting in an EIR of 4.07%.
| Calculation Methods | Loan Amount | Loan Tenure | Interest Rate | Total Repayment (including interest) |
| Flat rate method | $10,000 | 24 months | 3.0% per month | $17,200 |
| Reducing balance method | $10,000 | 24 months | 3.0% per month | $14,171 |
Bank personal loans in Singapore typically use the flat interest rate method, where interest is calculated based on the original loan amount throughout the entire loan tenure. This often results in a higher overall interest cost. In contrast, licensed moneylenders generally use the reducing balance method, where interest is charged only on the remaining loan balance.
This means you pay less interest over time as your loan gets repaid, potentially making it more cost-effective in the long run despite the higher initial rates.
More often than not, borrowers are disappointed to find that they do not qualify for the low interest rates advertised. With a free loan comparison platform like Loan City, they can easily compare the actual Effective Interest Rates (EIR) across different providers and make more informed borrowing decisions.
Should You Always Choose the Loan with the Lowest EIR?
Here is an illustrative table to compare how a lower EIR with a longer tenure can actually result in a higher overall cost:
| Loan Amount | Advertised Interest Rate | Loan Tenure | Effective Interest Rate (EIR) | Total Repayment (including interest) |
| $20,000 | 4% | 24 months | ~2.8% | $13,481.76 |
| $20,000 | 4% | 12 months | ~3.1% | 7,572.48 |
A lower Effective Interest Rate (EIR) can sometimes come with a longer loan tenure, which may actually lead to a higher total cost over time. While your monthly repayments might be smaller, stretching them over more years means you could end up paying more in total interest.
Interest keeps accruing over the entire loan period. Making repayments over a longer duration simply means more interest will be charged on your outstanding balance. That is why it is important to look beyond just the EIR and consider the total repayment amount when comparing loan offers.
Need Help Comparing EIR?
Comparing Effective Interest Rate (EIR) across different personal loans in Singapore can feel like trying to read fine print during a blackout. Every bank and licensed moneylender presents their rates differently, often burying the true EIR in the terms and conditions.
This makes it even more important to use loan comparison platforms like Loan City that clearly show EIR side by side. Whether you are a first-timer or just want to avoid being blur like sotong, you will be able to see, compare, and decide without the headache.
After all, even a 1% difference in EIR could save you hundreds in total repayment cost.
Ready to Find the Right Personal Loan for You?
Understanding how to calculate the Effective Interest Rate (EIR) can save you from costly surprises. Whether you are eyeing a low-interest personal loan or comparing loan offers from banks and licensed moneylenders in Singapore, knowing the true cost of borrowing will help you make smarter financial decisions.
Loan City simplifies your search for the best personal loans in Singapore. Our platform helps you compare loan offers with low interest rates and fast approvals from a wide network of trusted loan providers, all in one place.
