EIR (Effective Interest Rate)

The Effective Interest Rate (EIR) is a metric that shows the true cost of borrowing. It includes the nominal interest rate, any fees or charges, and how often interest is compounded. This helps borrowers compare loan offers on a like-for-like basis and understand the actual cost of each option.

Example

Suppose a borrower is comparing two loan offers with the same nominal interest rate of 5%. One loan compounds interest annually, while the other compounds interest monthly. Using the EIR, the borrower can see that the loan with monthly compounding has a slightly higher effective interest rate because interest is applied more often. That increases the total cost of borrowing. By comparing the EIR of each loan, the borrower can assess the true cost of both options and choose the loan that fits their needs.