Do Not Fall Flat on Personal Loan’s Flat Rate (Part II)
In Part 1, Jason took a RM10,000 personal loan for 36 months at 8.5% flat rate per year. He thought the rate is a good bargain as he is paying 0.71% per month. However, unbeknown to him, his actual monthly interest rate is 1.28% and the annual rate is 15.4%, much higher than what was quoted.
But that’s not all. Jason did not went home with RM10,000, he actually only getting RM9,690.00. The “missing” RM310 went for the loan stamp duty fees at 0.5% of the loan amount, and RM160 for various pressing and handling fees charged by the bank. These are the standard fee charged by the banks and are directly deducted from loan disbursement.
And such fee deduction has a significant impact on the overall borrowing cost (interest rate). With the RM310 taken off, Jason’s actual cost of borrow is as follow:
- Monthly interests rate now double to 1.47% (vs 0.71%)
- Annual interest rate shot up to 17.65% (vs 8.5%)
- EIR is 19.10%.
The actual rate of a flat rate loan is much higher because the lender ignored the fact that borrower has been paying the loan which has gradually reduced the loan principle, but continues to charge the quoted flat rate on the principle borrowed. Interest rate quoted by the banks are nominal rate i.e. an indicative rate only. To know the actual interest rate, we need to convert nominal rate into Effective Interest Rate (EIR).
Bottom line
Frequently, the banks/lenders and most did not publish EIR often than not, those customer service staffs are not well-trained in this matter as well. Therefore when you applying for ANY FLAT INTEREST RATE LOAN, be it personal loan or car loan, always ask for the EIR. Use the EIR to make an informed decision.
If you were to compare car loans with personal loans, where both are using flat fixed rate, you will find a huge different: Car loan’s quoted rate is around 2-4% while personal loan is around 8.5-12.0% p.a. The question is then shouldn’t both have the same rate? The answer is no. Unlike car loan, personal loan is an unsecured loan and if the borrowers defaulted on their loans, the lenders have nothing to ‘compensate’ their losses, therefore the rate is much higher.
Nothing comes cheap in life. Treat those slippery flat rate personal loans with great cautions. Practice delayed gratification, avoid diving into the personal loan trap with dubious consummations and indulgence.
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Good info, now I know about EIR
after reading the info, EIR sound better but the figure looks bigger than flat rate. MAy i know,
1.what is the different between flat rate and EIR?
2.what is the benefit of a loan interest charged based on EIR compare to flat rate?
3. if i’ve been offered a personal loan with 19% EIR and credit card is charging 18%, should i take up the personal loan to do a debts consolidation? why?
Karen. Don’t get to bogged down by the term used. Simply put it, EIR reflects the true/actual cost of borrowing taking into consideration the outstanding balance and time period. The flat rate is a fixed rate and remained the same eventhought the loan principle has been reduced.
Flat rate can be converted to EIR so that one knows the true cost of borrowing. They are 2 different expression and carries different amount of information (EIR gives you a complete info)
When comparing loans, you must be comparing apple to apple. In the case of PL vs credit card, you can either compare them in flat rate of EIR to see which one is the lowest.