One loan, more than one rate
When comparing loans, the advertised rate is only one part of the cost. The lender may quote a flat rate, a monthly-rest rate, or an effective interest rate (EIR). The calculation method and payment schedule can make two offers with similar-looking rates cost quite differently.
MoneySense defines flat-rate interest as being calculated on the original amount borrowed. The interest charge does not shrink as you repay the principal. With monthly rest, interest is calculated on the outstanding balance; as that balance falls, the interest portion of the repayment falls too. MoneySense notes that flat rates are commonly used for car loans and personal term loans, while monthly rest is commonly used for home loans.
Why a flat rate can understate the cost
Imagine borrowing S$10,000 at a quoted flat rate. Even after you have repaid part of the original S$10,000, the interest calculation may still be based on the full original principal. A rate applied this way is not directly comparable to the same percentage charged on a shrinking balance.
The EIR translates the repayment schedule into an annualised measure that better reflects when money is borrowed and repaid. It can be higher than the advertised flat rate because interest is calculated on the original amount even as the balance declines. Fees can also affect the amount you actually receive and repay, so read the lender’s disclosure to understand what has been included in its EIR calculation.
Payment frequency matters
MoneySense gives a useful illustration: a S$1,000 loan has S$200 of interest over one year. If the entire S$1,200 is repaid after a year, the EIR is 20%. If the same total is paid in two S$600 instalments six months apart, the example EIR is 27.8%. With four quarterly payments of S$300, it is 34.6%.
The principal and total interest in those examples are the same, but earlier repayments mean some of the borrowed money is returned sooner. The EIR therefore reflects the timing of the cash flows, not just the total dollars labelled “interest.” These are illustrations, not rates for any particular lender or product.
Compare offers on the same basis
Ask each lender for the advertised rate, EIR, repayment schedule and total amount payable. Then compare:
- the cash you receive after any upfront fees;
- each repayment amount and its due date;
- total interest and all other charges;
- whether the rate is fixed or variable;
- penalties for settling early or missing a payment.
If the loan is variable-rate, ask how and when its reference rate can change. A repayment that fits today may not fit after a rate reset. For a home loan, use the bank’s repayment schedule and property loan fact sheet rather than assuming that an introductory rate continues throughout the loan.
Pick a repayment you can sustain
The loan with the lowest EIR may not always suit every borrower—for example, an early-repayment penalty could matter if you expect to repay quickly. Conversely, a longer term may reduce each monthly instalment while increasing total interest paid.
The right comparison is the full cost under the terms you expect to use. Don’t choose a loan from its headline rate alone: check the EIR, the schedule, the fees and the consequences of a rate change before signing.
Sources
- MoneySense: Costs of borrowing—flat rate, monthly rest and EIR — definitions and EIR examples; verified 15 Oct 2026.