Understanding effective interest rates on personal loans

Learn how EIR works and what rates to expect on your personal loan.

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Understanding effective interest rates (EIR) is essential for making an informed comparison between different loans. This guide will walk you through the basics of effective interest rates, including what you can realistically expect based on your credit history.

First, what’s an effective interest rate?

Many of us hold the misconception that the interest rates we end up paying on a loan are the exact interest rates as advertised by the provider. This is often far from the truth.

Interest rates quoted by providers are usually the advertised interest rate. This calculation only includes the interest payable on the amount you’ve borrowed. In reality, you’re more likely to end up paying the effective interest rate, which further includes fees for administration and application processing. Effective interest rates are thus a more accurate gauge of how much you could end up paying on a loan.

The effective interest rate on a loan is found alongside the advertised interest rate, in accordance with regulations by the Code of Advertising Practice for Banks. If you cannot locate the effective interest rate, this could mean that it does not differ from the advertised interest rate. Always clarify with your provider as an added measure of precaution.

What's an interest rate?

An interest rate is the percentage of your loan balance that you have to pay back in addition to the amount you borrowed. With personal loans, lenders often charge you interest with each scheduled repayment — usually once a month. Your monthly repayment actually has two parts: A repayment on your balance and an interest payment.

As your balance gets lower, the amount in interest decreases since it’s a percentage of that balance. Your payments on the balance, however, increase so you end up paying the same amount each month.

Why should I care about effective interest rates?

Comparing effective interest rates on different loans with the same term could help you root out the least expensive one. That’s because the interest rate alone doesn’t take into consideration how much fees impact your payments.

The most common fee associated with personal loans is a processing fee, which covers application costs. These tend to range from 1% to 6% of your loan amount and are subtracted from your funds before you receive them.

Let’s look at an example: Say you wanted to borrow S$10,000 and repay it over 5 years. You applied with two lenders and this is what they offered:

First lenderSecond lender
Interest rate11%9%
Processing fee1% (S$100)6% (S$600)
EIR11.43%11.52%
Monthly paymentS$219.60S$220.04

The second lender looks like a better deal when you look at the interest rate alone. But when you factor in the processing fee, it’s clear the difference is not nearly as big — even more apparent when you look at the monthly payment.

Compare effective interest rates from personal loan providers

Name Product Interest Rate From Minimum Loan Amount Maximum Loan Amount Processing Fee
DBS Personal Loan
3.88% 

EIR: 7.56%

S$500
Up to 10x your monthly salary
1% processing fee
Apply today and you could get an interest rate as low as 3.88% p.a. (EIR 7.56% p.a), plus a 1% processing fee. Loans of up to 10x your salary may be available.
Standard Chartered CashOne Personal Loan
3.48% 

EIR: 6.95%

S$1,000
Up to 4x your monthly salary, subject to a cap of S$250,000
S$0
Apply by 20 July 2020 to receive Cashback equivalent to 50% of your first month's instalment loan amount. T&Cs apply.
POSB Personal Loan
3.88% 

EIR: 7.56%

S$500
Up to 10x your monthly salary
Based on your personal credit and income profile
Enjoy a fast approvals service and an interest rate starting at 3.88% p.a. (EIR 7.56% p.a), plus a 1% processing fee.
HSBC Personal Instalment Loan
3.7% 

EIR: 7%

S$1,000
S$200,000
S$88
Get an S$88 processing fee waiver if you apply by 31 October 2020. T&Cs apply.
Citi Quick Cash Loan
4.55% 

EIR: 8.5%

S$1,000
S$100,000
S$0
Get cash starting at 4.55% p.a. (EIR 8.5% p.a.) on a 36-month loan tenure. The interest you pay will vary depending on factors such as your credit score.
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Compare up to 4 providers

Pro tip: Compare effective interest rates for loans with the same repayment term for the best results

Your loan term is an easy-to-forget factor that goes into determining your effective interest rate.

How does this work? Looking at the previous example. Say you wanted to borrow S$10,000 from the first lender with the 11% interest rate but weren’t sure how much time you wanted to take to pay it back. Compare two different loan terms:

24-month term (2 years)60-month term (5 years)
EIR12%11.43%
Monthly paymentS$470.74S$219.60
Total interest paidS$1,197.74S$3,075.91
Total loan costS$11,297.74S$13,175.91

Three things become clear when you look at this comparison: A shorter loan term can increase your effective interest rate, increase your monthly payments but lower your overall loan cost.

Higher effective interest rates for shorter-term loans aren’t necessarily more expensive — in fact, the opposite could be true. That’s why it’s more effective to compare loan effective interest rates with similar terms. The lowest effective interest rate for the same loan term is, in fact, the least expensive.

What’s a good effective interest rate on a personal loan?

Since effective interest rates are heavily dependent on your personal credit score, it’s hard to say what makes a good overall rate.

Personal loans come with effective interest rates that range from 7% to 25%, though you can sometimes find an effective interest rate as low as 6%. The lowest rates are available for people with good or excellent credit, while higher rates tend to go to those with low credit or a poor credit history. In general, most borrowers prefer loans with the lowest effective interest rate. However, do take note that this doesn’t always guarantee the lowest payments. You’ll have to consider a range of factors alongside your effective interest rate in order to determine your final payment costs. Such factors include your loan tenure and monthly income.

Don't be fooled by starting EIRs: They're only for people with perfect credit

We’ve all done this: Looked at the lowest possible rate on a loan and assumed it’s the rate we’d get. In reality, those low rates only apply to the small group of people who have absolutely perfect credit.

To get a better idea of what you can expect with a lender, fill out a prequalification application or use a calculator to get a personalised rate. Prequalification typically doesn’t require a hard credit check, so your credit score shouldn’t be affected.

Keep in mind that your prequalification rates might not be what you end up with — you’ll know your exact rate only after you fully apply. Think of it as a risk-free way of making a more informed decision.

Fees that effective interest rates don’t factor in

It’s tempting to think that effective interest rates cover your total loan cost, but technically there are some other fees that don’t factor in. These fees are circumstantial, so you won’t necessarily have to pay them. They include:

  • Early settlement fees. Some lenders charge a fee or penalty for repaying your loan early. You could find lenders that don’t charge early settlement fees though.
  • Late fees. Most lenders charge a fee for paying late — usually S$80.
  • Nonsufficient funds or returned cheque fees. If you try to make a payment from an account without enough funds, many lenders charge a fee (usually the same amount as the late fee).

You might be able to save with autopay

Setting up automatic payments after taking out a loan has become pretty standard — and for good reason. Not only does it makes payment less of a hassle, but some lenders also knock down your effective interest rate by .25% — and sometimes as high as .50% for signing up.

Bottom line

Understanding personal loan effective interest rates is essential to making a strong comparison. Comparing effective interest rates is the simplest way to tell which loan — with the same terms — is cheapest. Instead of going by the lowest advertised rates, try getting prequalified with a few lenders to see what type of EIR you can expect.

Not sure where to start? Use our comparison tools to explore your personal loan options.

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