By MoneyBees
Convert a flat interest rate to the effective interest rate (EIR) and back, with the monthly instalment, the total interest, what a processing fee adds and why the EIR is close to double.
A flat rate charges interest on the original loan for the whole tenure. The effective interest rate (EIR) charges it only on what you still owe, so it shows what the loan really costs.
You repay part of the loan every month, so on average you owe about half of it. Paying interest on the full amount while owing half works out to close to twice the rate.
Find the monthly rate at which your instalments repay the cash you received, then compound it over 12 months. The calculator does this for you, the same way as MoneySense's examples.
Yes. The same flat rate gives a higher EIR over a longer tenure, because you keep paying interest on money you have already repaid for longer.
The fee comes off the cash you receive, but you still repay the full loan. That raises the EIR, more so on short loans.
MoneySense says flat rates are common for car loans and personal term loans. Home loans usually charge interest on monthly rest.
Usually, since the EIR counts the rate and the fees. MoneySense notes one exception: if you plan to repay early, a loan without an early repayment fee can cost less even with a higher EIR.
Yes. For the same interest, smaller and more frequent repayments give a higher EIR. MoneySense's S$1,000 example goes from 20% with one repayment to 41.3% with twelve.
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