Flat vs Reducing Rate Converter
A flat rate always sounds cheaper than it is. Convert it to the reducing-balance rate a bank would have to quote for the same repayment.
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How it works
A flat rate charges interest on the full original amount for the whole term, even though you have been repaying it all along. A reducing-balance rate — the basis every mortgage and most regulated lending uses — charges only on what you still owe.
The result is that a flat rate is worth close to double when restated honestly. A 10% flat rate over five years is above 17% reducing. Lenders quoting flat rates are not doing anything illegal, but the two numbers are not comparable and should never be set side by side.
Flat interest = P × rflat × t · Reducing rate solves EMI = P × r(1+r)ⁿ ÷ ((1+r)ⁿ − 1)
- P — the principal — the amount borrowed
- rflat — the quoted flat annual rate
- t — the term in years
- r — the equivalent monthly reducing rate the calculator solves for
Worked example
Borrowing 100,000 at a quoted 10% flat rate over 5 years
Inputs
Results
The quoted 10% is really 17.3%. Anyone comparing this against a 12% reducing-balance offer would pick the wrong loan.
Frequently asked questions
Why is the reducing rate almost double the flat rate?
Because on a flat rate you keep paying interest on money you have already repaid. By the final year you owe very little but are still charged as though you owed the full original amount. Restated on the actual balance, the rate roughly doubles.
Where will I run into flat rates?
Vehicle and consumer finance, some personal and gold loans, and a great deal of dealer-arranged credit. They are common wherever the headline number is the main selling point.
Is a flat rate ever the better deal?
Only if the converted figure still beats the alternatives. Convert first, then compare — the point of this tool is that the two rates cannot be judged against each other in their quoted form.
Is my data sent anywhere?
No. The calculation runs entirely in your browser. Nothing you type is transmitted to us or stored.
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