1. What is Effective Interest Rate?

The Effective Interest Rate (EIR) is the actual interest rate on a loan or financial product when compounding is taken into account. In Singapore, banks are required to disclose EIR to help consumers compare different financial products more accurately.

2. How Does the Calculator Work?

The calculator uses the EIR formula:

Where:

• \( Nominal \) — Nominal annual interest rate (in percentage)
• \( m \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding, showing the true cost of borrowing or the true return on investment.

3. Importance of EIR in Singapore

Details: In Singapore's financial market, EIR is crucial for comparing loans, credit cards, and savings products as it provides a standardized way to compare products with different compounding frequencies.

4. Using the Calculator

Tips: Enter the nominal interest rate (as a percentage) and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why is EIR higher than the nominal rate?
A: EIR accounts for compounding effects, which means you're paying interest on previously accumulated interest, making the effective rate higher.

Q2: How does compounding frequency affect EIR?
A: More frequent compounding (e.g., daily vs. monthly) results in a higher EIR for the same nominal rate.

Q3: Is EIR the same as APR?
A: In Singapore, EIR is similar to Annual Percentage Rate (APR) but may differ if APR includes other fees. Always check what's included in the rate.

Q4: What's a typical EIR for Singapore credit cards?
A: Most credit cards in Singapore have EIRs between 20-30% per annum, though promotional rates may be lower.

Q5: How is EIR used in housing loans?
A: Singapore housing loans often advertise both nominal and effective rates to help borrowers compare different loan packages accurately.