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 rate (EIR) is an important step toward making an informed comparison between different loans. We walk you through the basics of EIR, throw in a few examples and tell you what you can realistically expect based on your credit history.

First, what’s an effective interest rate?

EIR is your loan’s interest rate and financing fees expressed as a percentage. Because it’s written as a percentage, it’s easily confused with interest rates — it doesn’t help that when there are no fees, EIR and interest are the same.

Most personal loan providers base your EIR on the amount you borrow, the time you have to pay back your loan (or loan term), your financial history and any fees.

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 EIR?

Comparing EIRs on different loans with the same term is the easiest way to tell which is the least expensive. 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 five 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)
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 rates from personal loan providers

Name Product Interest Rate From Effective Interest Rate Minimum Loan Amount Maximum Loan Amount Loan Tenure
HSBC Personal Loan
Up to 7 years
Apply by 29 February 2020 and get a promotional interest rate from 3.7% p.a. (EIR 7% p.a. is only applicable to customers with annual income of at least $80,000, and tenor between 3-7 years) and receive S$108 cashback plus S$88 processing fee waiver. T&Cs apply.
Standard Chartered CashOne Personal Loan
Up to 4x fixed monthly salary, subject to a cap of S$250,000.
1 - 5 years
Receive cashback amounting to 50% of your first month’s instalment amount and S$199 credit on your approved loan. Ends 31 March 2020.
Citibank Personal Loan
Up to 5 years
Receive cash starting at 4.55% p.a. (EIR 8.5% p.a.) on a 36-month loan tenure.

Compare up to 4 providers

Pro tip: Compare 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 EIR.

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)
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 EIR, up your monthly payments but lower your overall loan cost.

Higher EIRs 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 EIRs with similar terms. The lowest EIR for the same loan term is, in fact, the least expensive.

What’s a good rate on a personal loan?

Since EIR is heavily dependent on your personal credit score, it’s hard so say what makes a good overall rate.

Personal loans come with EIRs that range from 7% to 25%, though you can sometimes find an EIR 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.

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.

Fixed vs. variable interest

When looking at different lenders, you might come across the terms “fixed-rate” and “variable-rate” interest. Fixed-rate interest doesn’t change throughout your loan term, but a variable rate loan might as the market fluctuates.

Why would anyone get a variable rate loan? They tend to have a lower, more attractive, starting EIR. It’s possible that they’ll stay at that low rate the whole time — but not likely.

Fees EIR doesn’t factor in

It’s tempting to think that EIR covers 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, some lenders knock down your EIR by .25% — and sometimes as high as .50% for signing up.

Bottom line

Understanding personal loan EIR is essential to making a strong comparison. Comparing EIR 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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