Put three loan offers side by side, and you’ll often find three different ways of describing the price. One bank advertises 3.88% a year. Another shows 3.5% with a 1% processing fee. A licensed moneylender quotes 1.5% a month. Each number is accurate, but none can be compared as written.
This is not an accident of marketing. Loan pricing in Singapore is expressed in formats that make the headline number look as small as possible, and the only way to compare offers fairly is to convert them into the same measure. That measure is the effective interest rate.
Here is how it works, with real numbers, so you can do the comparison yourself.
The flat rate: simple, and simply misleading
A flat rate calculates interest on the original loan amount for the entire tenure, as if you never repaid a cent until the end.
Borrow $10,000 at 4% flat over three years, and the sum is straightforward: $10,000 × 4% × 3 years = $1,200 in interest. Add that to the principal, divide by 36 months, and your instalment is $311.11.
The catch is that you don’t owe $10,000 for three years. You start repaying in month one, so by the halfway mark you owe roughly half the original sum, and by the final year you owe very little. Yet the interest was calculated as though the full $10,000 stayed outstanding the entire time.
In other words, you pay interest on money you’ve already returned.
What the EIR actually measures
The effective interest rate expresses the cost of the loan as an annual rate on the balance you actually owe from month to month. It also folds in compulsory fees, which the flat rate ignores entirely.
Run the same $10,000 loan through that lens and the 4% flat rate becomes an EIR of about 7.5% a year. Add a 1% processing fee, which means you receive $9,900 but repay as though you’d received $10,000, and the EIR rises to about 8.2%.
Same loan, same instalment, same total repayment. The EIR simply tells the truth about what that money cost.
As a working rule, a flat rate on a typical personal loan converts to an EIR of roughly 1.8 to 1.9 times the headline figure before fees. When you see an advertised flat rate, mentally double it and you’ll be close.
Fees matter more than most borrowers expect
Processing and administrative fees are where loan comparisons most often go wrong, because their effect on the EIR depends heavily on how long you borrow for.
A fee is a one-off cost. Spread across five years, it barely moves the annual rate. Concentrated into six months, it can dominate the entire cost of borrowing. A 1% fee and a 0.5% lower interest rate can easily cancel each other out, and only the EIR will show you which offer actually wins.
When a lender offers you a choice between a lower rate with a fee or a slightly higher rate with none, don’t guess. Ask for the EIR of both.
The lowest EIR is not always the smallest bill
This is the point most EIR explainers leave out, and it matters.
Take a $5,000 loan at 3.5% flat with a 1% processing fee, and compare two tenures:
| 1-year tenure | 5-year tenure | |
|---|---|---|
| Monthly instalment | $431.25 | $97.92 |
| Total interest | $175 | $875 |
| Processing fee | $50 | $50 |
| Total cost of borrowing | $225 | $925 |
| EIR (approx.) | 8.3% | 7.0% |
The five-year loan has the lower EIR, because the fee is spread over more months. It also costs four times as much in actual dollars, because you’re borrowing for five times as long.
The EIR tells you the price of borrowing. The total cost tells you the bill. You need both. Use the EIR to compare different offers over the same tenure, then choose the shortest tenure whose monthly instalment you can comfortably sustain.
Reading a moneylender’s monthly rate
Licensed moneylenders typically quote interest per month rather than per year, which makes direct comparison with bank offers harder than it needs to be.
The conversion starts simply. A rate of 1.5% a month works out to 18% a year, or about 19.6% once monthly compounding is counted. That’s your baseline for comparing against a bank’s EIR.
Two further questions decide the real cost.
Is the rate charged on the reducing balance or the original principal? On a reducing-balance basis, each month’s interest is calculated only on what you still owe, so the monthly rate converts cleanly as above. If interest is calculated on the original principal throughout, the effective cost is considerably higher. Ask the lender directly, and check that the Note of Contract states it clearly.
What is the admin fee? On a short loan, this often matters more than the interest rate itself. Consider a $3,000 loan at 1.5% a month on a reducing balance:
| No admin fee | 5% admin fee | |
|---|---|---|
| Tenure | 6 months | 6 months |
| Monthly instalment | $526.58 | $526.58 |
| Total interest | $159 | $159 |
| Admin fee | $0 | $150 |
| EIR (approx.) | 18% | 36% |
The fee nearly doubles the effective annual rate, because $150 is a large cost relative to six months of borrowing. Stretch the same loan to 12 months and the EIR with the fee falls to around 28%, though total interest rises to about $300.
On a compounded basis, these figures run higher: 36% becomes about 43%, and 28% becomes about 32%.
None of this means a moneylender loan is the wrong choice. For someone who needs funds quickly, has been declined by a bank, or only needs to borrow for a short period, it may be the only workable option. It does mean you should go in knowing the effective cost rather than the headline rate.
Licensed moneylenders in Singapore also operate within legal limits that bank comparisons don’t involve. Interest is capped at 4% a month, administrative fees at 10% of the principal, and the total of all interest and fees can never exceed the amount borrowed. A licensed lender must also explain the loan terms to you in a language you understand before you sign. You can read more about what responsible disclosure looks like in our guide to loan transparency.
The 0% balance transfer
Balance transfers advertise 0% interest, and for the promotional period that’s genuinely true. The cost sits in the one-off fee, usually a few percent of the amount transferred.
Transfer $5,000 at 0% for six months with a 3% fee and repay it in six equal monthly instalments, and your effective annual cost is about 10.5%. That’s well below a credit card’s revolving rate and comparable to some personal loans. Clear it in a single payment at the end of the promotion instead, and the effective cost drops to about 6.1%, because you keep the full amount for longer.
The risk is what happens if you don’t clear it. Any balance remaining after the promotion typically reverts to the card’s standard interest rate, which is several times higher than a personal loan. A balance transfer is only cheap if you have a credible plan to repay it within the promotional window.
Calculate it yourself in Excel or Google Sheets
You don’t need a finance degree or a lender’s calculator to work out an EIR. One spreadsheet formula does it:
=RATE(number_of_months, -monthly_instalment, amount_you_actually_receive) * 12
For the $10,000 loan above with a $100 processing fee, that’s:
=RATE(36, -311.11, 9900) * 12
The result is about 8.19%, matching the EIR quoted earlier. The key detail is the third figure: use the amount that actually lands in your account after fees are deducted, not the headline loan amount. That single adjustment is what captures the true cost of the fee.
This monthly-rate × 12 method is how most Singapore banks present EIR. For the compounded annual figure, which runs slightly higher, use =(1+RATE(...))^12-1 instead.
If you’d rather work through repayments visually, our article on using loan calculators to plan your budget covers the practical side.
Comparing two loan offers properly
When you have offers in hand, ask every lender the same four questions and write down the answers:
- What is the EIR, including all compulsory fees?
- What is the total amount I will repay over the full tenure?
- Is interest charged on the reducing balance or the original principal?
- What are the fees for late payment and for early repayment?
Compare the EIRs at the same tenure to identify the cheapest lender. Compare total repayment to decide how long to borrow for. Check the last answer before signing, because an early repayment penalty can wipe out the savings from clearing a loan ahead of schedule.
The bottom line
The advertised rate is the number lenders want you to remember. The EIR is the number that tells you what borrowing actually costs, and the total repayment tells you what you’ll actually pay. A loan that looks cheap on the first measure can be expensive on the other two.
Converting every offer into the same terms takes ten minutes and one spreadsheet formula. That ten minutes is often worth hundreds of dollars.
If you’d like a clear breakdown of the EIR and total cost on any loan you’re considering, speak to our team and we’ll walk you through the numbers before you commit to anything.
Frequently Asked Questions
What is the difference between a flat rate and EIR? A flat rate calculates interest on the original loan amount for the full tenure. The EIR measures the cost against the balance you actually owe each month and includes compulsory fees, which is why it is almost always higher.
Why is the EIR almost double the flat rate? Because you repay the loan gradually, your outstanding balance falls each month, yet flat-rate interest is charged as if the full amount stayed outstanding. On a typical personal loan, the EIR works out to roughly 1.8 to 1.9 times the flat rate before fees.
Is a 1.5% monthly interest rate the same as 18% a year? Approximately. A 1.5% monthly rate on a reducing balance equals 18% a year, or about 19.6% once monthly compounding is included. If interest is charged on the original principal instead, the effective cost is higher.
Does a longer tenure make a loan cheaper? It usually lowers the EIR when there’s a processing fee, because the fee is spread over more months, but it increases the total interest you pay. A longer tenure lowers your monthly instalment, not your overall cost.
Which is cheaper: a lower rate with a fee or a higher rate with no fee? It depends on the tenure and fee size. Ask for the EIR of both options at the same tenure; the lower EIR is the cheaper loan.
Do licensed moneylenders have to disclose the full cost before I sign? Yes. A licensed moneylender must explain the loan terms, including interest and fees, in a language you understand and provide a Note of Contract before the loan is granted.
What is the maximum interest a licensed moneylender can charge in Singapore? Interest is capped at 4% per month, and the total of all interest and fees cannot exceed the principal amount borrowed.
How do I calculate EIR in Excel? Use =RATE(months, -monthly_instalment, amount_received) * 12, where the amount received is the loan amount after any processing or admin fee is deducted.
