Conversion of a flat interest rate to an Effective Interest Rate (EIR)
We won’t bore you with the formula to convert a flat interest rate to an EIR, but basically, the EIR for a flat rate is actually about 2 times the advertised flat interest rate.
If you’d like a rough estimate of the EIR for a flat interest rate loan, you can just multiply it by 2. So a flat rate of 3% per annum would have an EIR of about 6% per annum.
How’s this important? Say you’re trying to decide between getting a credit card and a personal loan. You can compare their EIRs to see which one is actually better.
For example, if the personal loan interest advertised is 12% per annum, this means the EIR is about 24%! If a credit card’s EIR is 18%, you’ll see the credit card might actually be the better option. Since a credit card’s interest reduces as you pay the balance off (it’s a reducing balance interest after all), you might end up paying even less than 18% in interest if you pay off the whole amount within 1 year.
For a more accurate calculation, use our EIR calculator.