The effective interest rate (EIR) is, in MoneySense’s words, the true cost of a loan — and it can be higher than the advertised rate because of how interest is calculated. A flat-rate loan charges interest on the original amount for the whole term, so MoneySense’s 2.5% flat car loan example works out to about 4.84% a year as an effective annual rate, on Money Snap’s calculation.
Key takeaways
- MoneySense defines the EIR as the true cost of a loan, which may be higher than the advertised rate because of the way interest is calculated, and presents it as a basis for comparing loan packages.
- Under a flat rate — common for car loans and personal term loans — interest is charged on the original amount for the whole term, so the EIR is higher than the advertised rate. Under monthly rest, commonly used for home loans, interest is charged on the reducing balance, and MoneySense treats the rate and the EIR as the same.
- How often repayments fall due matters too. On SGD 1,000 with SGD 200 of interest over a year, MoneySense shows the EIR rising from 20.0% with one repayment to 41.3% with twelve.
- MoneySense lists other loan costs separately from interest: processing, amendment, cancellation and excess fees, late payment and default charges, and early repayment charges. It also notes the loan with the lowest EIR is not always the preferred one — for instance, for a borrower who intends to repay early.
- MAS Notice 632A requires banks to give a property loan fact sheet covering tenure, rate, amount, repayment schedule, fees and a rate-change illustration; the EIR appears there only as a footnote prompting borrowers to ask how rate changes affect it.
What is EIR in a loan?
The same advertised rate can mean very different costs depending on what the interest is charged on. The EIR puts loans priced different ways onto one yearly scale.
Money Snap’s effective rates solve for the monthly rate that repays the loan with its instalments and compound it over twelve months — the method that reproduces MoneySense’s own frequency table. Money Snap’s car loan calculator reports the EIR the other common way, as the monthly rate × 12, which is 4.73% for this loan; both describe the same loan.
Same interest, different EIR
MoneySense’s example: SGD 1,000 borrowed for a year, SGD 200 of interest in every case. Only how often the SGD 1,200 is repaid changes — and the sooner money goes back, the higher the effective rate.
| Repaid | Each repayment | EIR |
|---|---|---|
| Once, after a year | SGD 1,200 | 20.0% |
| 2 times | SGD 600 | 27.8% |
| 4 times | SGD 300 | 34.6% |
| 6 times | SGD 200 | 37.7% |
| 12 times | SGD 100 | 41.3% |
SGD 90,000 at 2.5% flat
MoneySense’s car loan example. The longer loan has a slightly lower effective rate but costs SGD 4,500 more in interest, because the money is borrowed for longer.
Where the gap between rate and EIR appears
Five things people get wrong
- MoneySense — Costs of borrowing: flat rate, monthly rest and EIR — the definition, the frequency table and the car loan example
- MoneySense — How home loans work — monthly rest and comparing packages
- MoneySense — The real cost of instalment payment plans — flat rates on in-house instalment plans
- MAS — Notice 632A Residential Property Loans: Fact Sheet — what a property loan fact sheet must show
- MAS — Notice 635 Unsecured Credit Facilities to Individuals — the EIR warning on some credit statements
- HDB — Housing Loan from HDB — HDB loan interest computed on monthly rest
Official MoneySense and MAS material; effective rates for the car loan example are Money Snap’s calculation. For general information only. Not financial advice.
This page is provided for educational and informational purposes only. It does not constitute financial advice. All figures and worked examples are estimates for illustrative purposes, are subject to change, and do not reflect any individual’s circumstances. Always refer to MAS, MoneySense and HDB and seek independent professional advice before making any financial decisions.