Key takeaways
- A flat rate charges interest on the original amount for the whole loan, even though you are paying it down. [10]
- The effective interest rate (EIR) reflects what you actually pay. For flat-rate loans it is higher than the advertised rate. [10]
- In our illustration, a 4.5% flat rate over 4 years works out to about 8.4% to 8.7% a year, depending on how it is annualised.
- Fees paid upfront push the real cost higher still.
- Always ask for the EIR and a full repayment schedule. [10]
Key facts
- MAS MoneySense explains that the effective interest rate on a flat-rate loan is higher than the advertised rate, while on a monthly rest loan it is the same. [10]
- In Riverell's illustration (not a quote or a market rate), S$80,000 at 4.5% flat over 4 years has an EIR of about 8.36% nominal, or 8.69% compounded.
Key terms
- Flat rate
- An interest rate charged on the original loan amount for the whole term, even as you repay it. The effective rate on a flat-rate loan is higher than the advertised rate. [10] In the glossary
- Monthly rest (reducing balance)
- A way of charging interest on the amount you still owe, so interest falls as you repay. For this kind of loan, the effective rate is the same as the advertised rate. [10] In the glossary
- Effective interest rate (EIR)
- The true cost of a loan expressed as an annual rate, taking into account how you repay over time. It lets you compare loans quoted in different ways. [10] In the glossary
What is the difference between a flat rate and EIR?
A flat rate charges interest on the original loan amount for the whole term, while the effective interest rate (EIR) shows the true annual cost after taking account of how you repay. [10]
Flat rate. Interest is calculated on the original loan amount for the full term. MoneySense notes that the effective rate on a flat-rate loan is higher than the advertised rate. [10]
Monthly rest (reducing balance). Interest is calculated on the amount you still owe, so it falls as you repay. For this kind of loan, MoneySense notes the effective rate is the same as the advertised rate. [10]
Effective interest rate (EIR). The EIR expresses the true cost as an annual rate, taking into account how you repay over time. It lets you compare loans quoted in different ways. [10]
Why is the EIR higher than the flat rate?
The EIR on a flat-rate loan is higher than the flat rate because you pay interest on the full amount every month, even after you have repaid much of it. Your average balance is roughly half the original loan, but you are charged as if you owed all of it.
How often you repay also matters. MoneySense gives this example for S$1,000 borrowed for a year with S$200 of interest: [10]
| Number of repayments | Effective interest rate |
|---|---|
| 1 (one lump sum at the end) | 20.0% |
| 2 | 27.8% |
| 4 | 34.6% |
| 6 | 37.7% |
| 12 (monthly) | 41.3% |
The interest charged is S$200 every time. The difference is how long you actually hold the money. The more often you repay, the less you owe on average, and the higher the true rate on what you still have.
Worked example
A business borrows S$80,000 at 4.5% flat for 4 years, repaid in 48 monthly instalments.
- Interest = S$80,000 x 4.5% x 4 = S$14,400.
- Total to repay = S$94,400.
- Monthly instalment = S$94,400 / 48 = S$1,966.67.
Now find the interest rate that makes 48 payments of S$1,966.67 equal to S$80,000 received today. Solving this gives a monthly rate of about 0.697%.
| How it is expressed | Result |
|---|---|
| Monthly rate x 12 (nominal annual rate, comparable with a monthly rest quote) | about 8.36% a year |
| Monthly rate compounded over 12 months, (1 + 0.697%)^12 - 1 | about 8.69% a year |
MoneySense's example figures match the compounded method on our calculation. [10] Lenders may present EIR differently, so ask how theirs is worked out.
Either way, the "4.5%" loan costs much more than 4.5% a year.
What the repayment schedule reveals
A flat-rate loan usually splits each instalment the same way every month: S$300.00 interest (S$14,400 / 48) and S$1,666.67 principal. That split hides the real cost.
If you rework the same S$1,966.67 instalments at the effective monthly rate of about 0.697%, the picture changes (illustration only):
| Month | Interest | Principal repaid | Balance still owed |
|---|---|---|---|
| 1 | S$557.49 | S$1,409.18 | S$78,590.82 |
| 12 | S$445.63 | S$1,521.04 | S$62,426.44 |
| 24 | S$313.44 | S$1,653.23 | S$43,325.65 |
| 36 | S$169.77 | S$1,796.90 | S$22,564.92 |
| 48 | S$13.61 | S$1,953.06 | S$0 |
This matters most if you want to repay early. How the amount owed on early settlement is worked out varies by lender, so ask the lender how it calculates it and whether interest for the remaining months is still charged. MoneySense lists early repayment charges among the costs to check, and suggests checking the repayment schedule before you sign. [10]
Compare it with a reducing-balance loan
The same S$80,000 at 4.5% on a monthly rest basis over 48 months:
| 4.5% flat | 4.5% monthly rest | |
|---|---|---|
| Monthly instalment | S$1,966.67 | S$1,824.28 |
| Total interest | S$14,400.00 | S$7,565.39 |
| Approx. EIR (nominal / compounded) | 8.36% / 8.69% | 4.50% / 4.59% |
Same headline rate, nearly double the interest.
Upfront fees raise the cost
Suppose the same flat-rate loan also has a 2% processing fee taken from the loan amount. You receive S$78,400 but still repay S$1,966.67 a month. The rate on what you actually received rises to about 9.42% nominal, or 9.84% compounded. (Illustration only.)
This is why the fee table matters as much as the rate. [10] The same applies to invoice financing, where fees and a discount charge come off what you receive: see the cost example in our invoice financing guide.
How do I convert a flat rate to EIR?
To convert a flat rate to an EIR, work out the monthly instalment, then find the monthly rate that makes all the instalments equal to the amount you actually receive. In Excel or Google Sheets:
- Monthly rate:
=RATE(48, -1966.67, 80000)gives about 0.697%. - Nominal annual rate: multiply that by 12.
- Compounded annual rate:
=(1+RATE(48,-1966.67,80000))^12-1.
Replace the numbers with the loan amount you would actually receive, the monthly payment and the number of months.
Lowest EIR is not always best
MoneySense points out that a loan with a slightly higher EIR may suit you better if, for example, it has no early repayment penalty and you plan to repay early. [10] Compare the whole package: rate, fees, flexibility and what happens if you are late.
What to check before you agree
- Is the rate quoted flat or on a monthly rest basis?
- What is the EIR, and how was it calculated? [10]
- Can I have a full repayment schedule showing interest and principal each month? [10]
- Which fees are deducted upfront, and does the EIR include them?
- What does early repayment cost? [10]
- Can the lender change the rate or terms during the loan, and with how much notice? [10]
Frequently asked questions
What is the difference between a flat rate and an effective interest rate?
A flat rate charges interest on the original loan amount for the full term. The effective interest rate expresses the true cost as an annual rate, taking into account how you repay over time, so you can compare loans quoted in different ways.
Source: [10]
Why is the EIR higher than the flat rate?
With a flat rate you pay interest on the full amount every month, even after you have repaid much of it. Your average balance is roughly half the original loan, but you are charged as if you owed all of it, so the true annual rate is higher.
Source: [10]
How do I convert a flat rate to EIR?
Work out the monthly instalment, then find the monthly rate that makes all the instalments equal to the amount you actually receive. In Excel or Google Sheets, =RATE(48,-1966.67,80000) gives about 0.697% a month for Riverell's illustration; multiply by 12 for the nominal annual rate, or compound it for the annual rate.
Is a flat rate or a reducing balance rate cheaper?
At the same headline rate, a reducing balance (monthly rest) loan costs less. In Riverell's illustration of S$80,000 over 4 years, 4.5% flat costs S$14,400 in interest, while 4.5% on a monthly rest basis costs about S$7,565. The figures are an illustration only, not a quote.
Disclaimer. This guide gives general information only. It is not financial, legal or tax advice, and it is not a recommendation of any product or provider. Riverell is not a lender and does not arrange loans. Figures and scheme details were checked against the sources listed on 25 Oct 2026 and can change. Always confirm terms directly with the provider, and get independent professional advice if you are unsure. LEGAL REVIEW
Sources
- [10]MAS MoneySense - Costs of borrowing: flat rate, monthly rest and effective interest rate (last updated 22 Apr 2026). https://www.moneysense.gov.sg/costs-of-borrowing-flat-rate-monthly-rest-and-effective-interest-rate/ (accessed 25 Oct 2026)