You will compare an instalment loan, a credit line and a balance transfer for the same need on EIR and total cost.
By now Aisha has three ways to raise S$10,000 for her father's dental bill, and each one is described in a different language. The personal loan quotes a flat rate. The credit line quotes a yearly rate and an annual fee. The balance transfer quotes 0% and a percentage fee. Side by side on her phone, they look impossible to compare, which suits every lender that would rather you didn't.
This exercise puts all three into the same units: the total you repay and the EIR, over the same period. Allow about 30 minutes. The worked example uses Aisha's case with made-up figures, chosen to show the method. When you do it yourself, use real offers.
Pick a realistic period for your own need. Aisha's siblings will repay her over about a year, so she uses 12 months.
Go to bank websites and find one current offer of each type: a personal instalment loan, a credit line and a balance transfer. For each one, write down the date you checked, because rates and promotions change. Record the following for each offer:
the rate as quoted, and whether it is flat or charged on the reducing balance the EIR if the lender shows it every fee: processing, annual, transfer, and any charge for early repayment for the balance transfer, the promotional period and the rate that applies afterwards the minimum term, if any
Aisha's example figures are these. The instalment loan is 3.5% flat for one year, with a S$100 processing fee. The credit line is 20% a year on the reducing balance, with a S$100 annual fee. The balance transfer is 0% for six months with a 3% fee, S$300 on S$10,000, then an example 26% a year on whatever is left.
Each product repays differently, so you have to decide how you would actually use it over the 12 months and model that.
For the instalment loan, use the EIR calculator you built in How money works: banks, interest, inflation and risk, lesson 3.4, Calculate the EIR of a flat rate offer with the RATE function. Aisha's loan has flat interest of S$10,000 times 3.5%, which is S$350. The instalment is S$10,350 divided by 12, which is S$862.50. With the S$100 fee counted, she pays S$10,450 in total, and the calculator gives an EIR of about 8.3%.
For the credit line, plan to repay it in 12 equal monthly payments, because that is the only fair comparison with a one-year loan. In a spreadsheet, =PMT(20%/12,12,-10000) gives about S$926.35 a month. Over 12 months that is about S$11,116 repaid, plus the S$100 annual fee, so about S$11,216 in total. Counting the fee, the EIR comes to about 22%.
For the balance transfer, the 12-month need does not fit a six-month promotion, and this is where many people get caught. If Aisha pays S$833.33 a month, a twelfth of the balance, she still owes S$5,000 when the six months end. That S$5,000 then moves to the example 26% rate. Clearing it over the remaining six months takes about S$897.66 a month, =PMT(26%/12,6,-5000), with about S$386 of interest. Her total is S$300 fee, plus S$5,000 in the first six months, plus about S$5,386 in the second, about S$10,686. Because the payments are uneven, use the IRR function on the monthly cash flows to get the EIR: about 12.6%.
Before ranking, check three things for each option.
First, the rate after any promotion ends, as in the balance transfer above. Leaving it out would make the transfer look like it costs only S$300.
Second, fees that only appear in some cases, such as an early repayment charge on the loan. If you think you might repay early, add it in.
Third, any annual fee that continues while the facility stays open. A credit line kept open after the balance is cleared may still charge one each year.
Rank the three options by total repaid. With Aisha's example figures, the order is the instalment loan at S$10,450, then the balance transfer at about S$10,686, then the credit line at about S$11,216. The EIRs come out in the same order: about 8.3%, 12.6% and 22%.
Then write one main risk beside each. For the loan, it is the fixed commitment and the early repayment charge if her siblings repay faster than expected. For the balance transfer, it is the jump to the full rate at month seven and the temptation to put new spending on the cleared card. For the credit line, it is that nothing forces the balance down, so a slow month or two quietly turns it into the most expensive option by an even wider margin.
Different figures can produce a different order. A shorter need favours the credit line, as lesson 3.2 showed, and a need you can clear inside the promotion favours the balance transfer, where the fee might be the only cost.
A finished comparison has three columns, one per option, and rows for the date checked, quoted rate, EIR, every fee, monthly payment, total repaid and main risk. The totals and EIRs are worked out over the same period. Below the table sits one sentence on which option you would choose for a 12-month need and the reason. Your version uses offers you found yourself, so the order may differ from Aisha's, and the reason you write is your own.
Fill in the comparison table for all three options and write which you would choose for a 12-month need and why.
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