Effective Interest Rate
Also known as: EIR, Reducing Balance Rate, Diminishing Principal Rate
True annual cost of borrowing calculated on reducing outstanding balance, also known as EIR or reducing balance rate.
Detailed Explanation
Effective Interest Rate (EIR) represents the actual annual cost of a loan where interest is calculated only on the outstanding principal balance. As you repay EMIs, the principal reduces and so does the interest calculation base. EIR is typically 1.8-2 times higher than the equivalent flat rate, showing the true cost of borrowing.
Related Calculators
Related Terms
Flat Rate Interest
Interest calculation method where interest is charged on the full original principal throughout the loan tenure.
Reducing Balance
Loan interest calculation method where interest is charged only on the outstanding principal amount.
APR
Annual Percentage Rate including all loan costs like interest, processing fees, and other charges.
Amortization Schedule
Detailed breakdown showing monthly EMI split between principal and interest throughout the loan tenure.