What is Effective Interest Rate (EIR) and how do you calculate it? - Seedly
 

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Asked by Anonymous

Asked on 08 Oct 2018

What is Effective Interest Rate (EIR) and how do you calculate it?

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The calculation is a bit technical and needs some background in financial mathematics, but it is a regulatory requirement to give the EIR for any lending product so dont need to stress on calculation.

The EIR is basically the real economic cost of borrowing after accounting for the fees and any funny/clever structures the provider has given. For example, I have got mass mailers offering a loan at 5% interest (high but not terrible) but after fees the EIR is 10% (ouch!). So as a customer protection measure - disclosing the EIR is mandatory and for a same-term loan that is the only number you need to compare, ignore the rest of the marketing fluff.

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