Flat vs Reducing Rate Calculator
Convert a flat interest rate into its reducing-balance equivalent to expose a loan's real cost.
About the Flat vs Reducing Rate Calculator
Enter the loan amount, the flat rate quoted and the term. The calculator shows the monthly payment, the total interest and the reducing-balance rate that produces the same payment, which is the number to compare with other loans.
Some car, personal and microfinance loans quote a flat rate: interest is charged on the original amount for the whole term, even as you repay. The true reducing-balance rate is nearly double for typical terms.
The formula
Flat payment = (P + P × flat × years) ÷ months; find the reducing rate giving the same payment
Worked example
10,000 at an 8% flat rate for 3 years
- Interest: 10,000 × 8% × 3 = 2,400
- Payment: 12,400 ÷ 36 = 344.44 a month
- Equivalent reducing-balance rate: 14.55%
Questions people ask
Why is it almost double?
On average you owe only about half the loan over the term, but pay interest on all of it.
Which rate should lenders show?
Many regulators require the APR or reducing-balance rate.
Does prepaying a flat-rate loan save interest?
Often less than you'd expect, because many flat-rate lenders front-load the interest.