Everyone wants to borrow money and pay back their personal loans with ease. However, the interest rates that are attached to these loans can make it difficult for people to repay their debt on time. This is where the Effective Interest Rate (EIR) comes into play.
It helps you compare personal loans with different interest rates so that you can pick the right one for yourself without feeling overwhelmed by all of its options!
What is an Advertised Interest Rate?
The advertised rate or nominal rate is the interest rate that the bank or loan provider charges you when you take out a loan. Flat fees and monthly rest rates are the two different types of advertised rates.
In a flat rate, the interest remains the same throughout the tenure period. This is usually applied to car loans and personal term loans.
On the other hand, with monthly rest, the loan’s outstanding balance is used to determine interest payments. The interest on the loan decreases over time as you make monthly payments toward the principal.
For instance, you would have to pay back 240 equal monthly payments of $3,480 if you had a loan for $600,000 with a 20-year term and a fixed rate of 3.5%.
What’s the Effective Interest Rate (EIR) in Singapore?
An effective interest rate (EIR) effectively represents the real cost of borrowing. This is typically higher than what is advertised because EIR includes additional costs such as processing or administrative fees.
Your loan tenure and frequency of repayment affect the compounding effect: if you have a longer repayment period and pay off your loan in full each month, you will pay less interest but more interest over time because each payment gets added to the principal amount more often.
If you have shorter repayment periods with more frequent payments but don’t make full payments every month, you’ll pay more per month but less interest overall because less time has passed between payments and less compounding.
How do You Calculate EIR?
EIR is calculated by using the following formula:
[(1 + (nominal interest rate / no. of compounding periods) ^ (no. of compounding periods)) – 1 ]
For the majority of loans, the “compounding period” is one month. Keep in mind that the “nominal interest rate” is distinct from the interest rate that is also promoted. Actually, it’s a reference to your total debt’s internal rate of return.
You should keep in mind that EIR may be higher than the original loan agreement if you make additional payments (such as partial payments). If so, it will apply until your balance is zero again–and then revert back to what was agreed upon originally!
Why is the EIR Important?
The actual interest rate you will pay on your personal loan is known as the Effective Interest Rate (EIR). This accounts for additional expenses like processing or administrative fees. It also takes into account the compounding effect, which is where the length of your loan and how frequently you make payments are important.
As EIR shows the real cost of borrowing, it’s important that you understand what this figure means and how it affects your overall debt burden over time. With this knowledge at hand, it becomes easier for consumers to make more informed decisions about their finances as well as choose between different options when applying for personal loans in Singapore!
Read Also: Top 8 Reasons to Get a Personal Loan in Singapore
Why are Effective Interest Rates Typically Higher than Advertised Rates?
If you’re asking for a personal loan in Singapore, you should understand the idea of interest. Because interest is added to the loan, you end up paying back more money than you originally borrowed. Simple rate or nominal rate refers to interest that is calculated as a proportion of the loan amount.
Banks impose a variety of fees on the services they provide, such as administrative or processing costs, which are added to your principal amount and raise its value over time. As a result, it becomes more difficult for borrowers to make their repayments within the specified time frame. They end up repaying more than they borrowed as a result, which brings us back to our first question “What is effective interest rate (EIR)?”
Should I Choose the Lowest EIR?
The effective interest rate should be taken into consideration if you’re looking at personal loans in Singapore and want to know what it is.
The effective interest rate gives you a much better picture of the true cost of borrowing or taking out a loan than any other figure on offer.
It takes into account all fees, charges and other costs associated with your loan and shows how much extra money each month will be going out of your pocket due to these factors. In short: if you want an accurate picture of what it would cost for someone else (or yourself) to borrow from a particular lender then this figure is crucial information indeed!
How Can I Find Out What the EIR Is?
To find out what the effective interest rate (EIR) is, look for it on your loan agreement or ask your bank or financial institution. The EIR will be displayed alongside an advertised interest rate.
If you do not see either of these figures anywhere in advertisements or documents related to your loan application, then there may not be any difference between them! This means that if someone offers you a personal loan with an advertised rate of 6%, he/she may actually charge higher than this–so beware!
The only exception would be if there was no difference between advertised rates and EIRs; in this case, there would also be no need for displaying either figure separately because they’ll both be equal anyway!
The Bottom Line
The effective interest rate is a way of comparing loans and finding the right one for you. You can use it to compare different private lenders and even different products offered by the same lender. By knowing what your effective interest rate will be before you take a loan, you’ll be able to make an informed decision about whether or not it’s worth going through with the application process.
Read Also: How to Get a Personal Loan with Bad Credit: The Ultimate Guide