What Is Interest Rate On Personal Loan – Have you ever wondered what the Effective Interest Rate (EIR) means for a personal loan? It is a useful value that you can use to compare different loan options to make the best choice. Find out what you need to know about EIR and other factors to consider when choosing a personal loan for your financial needs.
When learning more about personal loan options, the term “effective interest rate”, or EIR for short, often comes up. Knowing what that means can give borrowers a clear lens to evaluate and compare different loan options. Think of it as the “real” cost of the loan, as it takes into account factors such as how often you pay and the effect of compounding.
What Is Interest Rate On Personal Loan
In simple terms, EIR shows the total cost of borrowing a loan. Unlike the annual interest rate, which only tells you the base interest rate, the EIR gives you the bigger picture. The EIR is defined in terms of your loan as a percentage of the loan amount and takes into account the calculation of installments, times and amounts to give you the best cost of borrowing.
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Lenders often advertise their attractive annual interest rates to attract borrowers. However, the EIR is always higher if you want a clear view of interest collection. It’s the best way to compare loans.
For example, two banks offer 5% annual loan interest. But their payment methods may differ. One may allow you to pay in small amounts over a long period of time. But one can choose additional settings. Using the EIR gives you an apples-to-apples comparison. Furthermore, from 2023, financial institutions in Singapore must disclose EIRs of loan products to customers. This provides transparency and helps in informed decision making.
To calculate the EIR, see the scenario below or use the online EIR calculator. Another way to save time is to use our loan comparison platform. It allows you to quickly research and find the lowest interest rate for your loan in Singapore so you can make the best decision for your needs.
How do you calculate the EIR? Although banks have to account for high costs such as administrative fees when determining the EIR, let’s see how it is calculated in basic computing without additional costs.
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Imagine borrowing $10,000 for 12 months with monthly payments of $875 at 5% per year. Here’s what your EIR calculation will be:
Therefore, the total cost of the loan is $10,520.00. You will pay back this amount with an EIR of 5.2%.
Usually, a low EIR is favorable for a personal loan. However, you should consider factors such as flexible payment terms. Sometimes, a slightly higher EIR is better if it gives you more chance to repay the loan. This depends on individual needs.
Another important thing to consider is your monthly payment. Certain financial institutions may offer a lower EIR for a shorter term of the loan. But this comes with a higher monthly payment. It is important to consider whether you can meet the monthly payment as there are other issues at stake, such as late payment penalties, which can increase your financial burden.
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Loan Term and EIR: Often, a longer loan term means a lower EIR. However, they come with higher interest rates overall. For example, increasing the repayment terms from 12 to 24 months for the same rate and amount can lower the EIR from 5.2% to 4.7%. But the caveat is that while you pay less per month for the extended period, you pay more over 24 months. This is due to the additional compound interest added to the loan.
The table below provides effective personal loan interest rates in Singapore as of Sunday, October 15, 2023. The rates listed below are subject to change.
The EIR provides a comprehensive view of the cost of borrowing, which includes many factors. While it’s important to help you compare personal loan options, you still need to look at things like the total interest rate and the installment amount. Try the ROSHI loan site. It streamlines the search, offering options from different lenders on one platform.
ROSHI is one of Singapore’s leading aggregators of the comparative and independent loan market. We compare a variety of products including banking, insurance, investment and utility products. We also facilitate loan applications from borrowers and lending partners.
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