How to use this calculator
- Enter the Loan amount.
- Enter the Flat interest rate per year as quoted by the lender.
- Set the Loan term in months.
- Read the Monthly payment and the Effective rate (reducing balance), then check the Extra cost of the flat rate.
What a flat rate is
With a flat rate, interest is calculated once on the original amount you borrowed, for every year of the loan, and it ignores the fact that you repay part of the principal each month. The total interest is added to the loan and divided into equal installments.
Payment = (L + L · f · t) / n- L = loan amount
- f = flat rate per year (as a decimal)
- t = term in years (n ÷ 12)
- n = number of monthly payments
With a reducing-balance loan (the standard way mortgages and most bank loans work) interest is charged only on the amount you still owe, so it shrinks as you repay. The same quoted percentage therefore means very different costs.
Example: $10,000 at 8% flat for 36 months
Flat interest is 10,000 × 8% × 3 = $2,400, so you repay $12,400 at $344.44 a month. That looks like an 8% loan, but by the second month you owe less than $10,000 and are still charged on the full amount.
Solving for the rate that gives the same payments on a falling balance, the effective rate is 14.55%. A real 8% reducing-balance loan would have a payment of $313.36 and total interest of $1,281, so the flat rate costs $1,119 more.
Why the effective rate is higher
You hold the full amount only at the start. Averaged over the term, you borrow roughly half of it, yet the flat method charges as if you borrowed all of it throughout. As a rough guide the effective rate is close to double the flat rate.
That gap holds for other terms: the same loan over 12 months works out at about 14.45% effective and over 60 months at about 14.13%. Shorter or longer terms do not make a flat rate cheap.
How to use the result
Always compare loans on the effective rate (APR), never the flat figure. Ask any lender quoting a flat rate for the total repayable and the APR, then check it with the APR calculator.
To compare a flat-rate offer with another loan side by side, use the loan comparison calculator. For a standard reducing-balance loan, the loan calculator gives the payment directly.
Ways to avoid overpaying
- Convert every quote to an effective annual rate before deciding.
- Check what happens if you repay early: with flat-rate loans, lenders often use a formula that returns little of the interest.
- Look for add-on fees, insurance and processing charges that raise the real cost further.
- Where possible, choose a reducing-balance loan at the same stated rate; it is always cheaper.
- Borrow for a shorter term or less money if the budget allows.
Assumptions and limits
The calculator assumes equal monthly payments, interest paid in full at the flat rate and no fees, insurance or penalties. The effective rate is the annual percentage rate that makes the payments equal to the loan, expressed as a nominal yearly rate with monthly compounding.
Flat-rate rules and disclosure requirements differ by country; some regulators require lenders to show an APR. Your loan contract is the final word.
Frequently asked questions
Is a flat interest rate cheaper than a reducing balance rate?
No. At the same quoted percentage a flat rate costs much more, because interest is charged on the original amount for the whole term.
How do I convert a flat rate to an effective rate?
Find the rate at which equal payments of the flat-rate installment repay the loan on a falling balance. This calculator does that for you.
What is the rule of thumb for flat versus effective rate?
The effective rate is roughly twice the flat rate, a little less for longer terms. For exact figures, use the calculator.
Can I save interest by paying a flat-rate loan early?
Often only a little, since much of the interest is built into the early installments. Ask the lender how early settlement is calculated before signing.