How to use Flat Rate to Reducing Rate
- Enter the amount and the flat rate from the offer.
- Enter the term in years.
- Read the real yearly rate (APR), and compare it with offers quoted on a reducing balance.
- Switch to "Reducing balance" to go the other way and see the flat rate that costs the same.
Why use Flat Rate to Reducing Rate
Flat rate to APR
The reducing-balance rate that gives exactly the same monthly payment, solved exactly rather than with a rule of thumb.
Both directions
Enter a reducing rate instead to see the flat rate it matches.
Payment and total cost
The monthly payment, the total interest and a schedule for the flat offer.
Profit wording
For Islamic finance quoted as a flat profit rate, switch the wording to profit.
About this tool
With a flat rate, interest is worked out on the original amount for the whole term: 100,000 at 5% flat for 4 years costs 20,000 in interest, whatever you have already repaid. With a reducing rate, interest is charged only on the balance still owed, which falls every month. That is why the reducing rate that costs the same is almost twice the flat rate: 5% flat over 4 years works out at about 9.2% reducing.
Personal loans, car finance and instalment plans are often advertised with a flat rate, while home loans and most comparisons use a reducing or effective rate, often called the APR. This calculator finds the reducing rate that gives exactly the same monthly payment as the flat offer, so you can compare them fairly.
Frequently asked questions
How do I convert a flat rate to a reducing rate?
Find the reducing rate that gives the same monthly payment. There is no simple formula, so the calculator solves it exactly. As a rough guide, the reducing rate is a little under twice the flat rate.
Flat rate vs reducing rate: is 5% flat the same as 5% reducing?
No. Over 4 years, 5% flat costs about the same as 9.2% on a reducing balance, because the flat rate keeps charging on money you have already repaid.
Does the term change the real rate?
A little. At 5% flat, the reducing rate is about 9.1% over 1 year and 9.2% over 4 or 5 years, so the flat rate itself matters far more than the term.
What is the flat rate of a 12% reducing loan?
Over 5 years, 12% on a reducing balance costs the same as about 6.7% flat. Choose "Reducing balance" in the calculator to convert any rate this way.
Why do banks quote flat rates?
A flat rate looks lower because it is charged on the whole loan for the whole term, even as you pay it back. Converting it to a reducing rate (APR) shows the real cost, so you can compare offers fairly.
How do I work out a flat rate loan manually?
Interest = loan × flat rate × years. Add that to the loan and divide by the number of months to get the monthly payment. This calculator does that manual calculation and then finds the real reducing (APR) rate for the same payments.