Glossary
What is Flat rate interest?
Definition
Flat rate interest is calculated once on the original loan amount for the whole term, then divided into equal installments, regardless of how much principal has already been repaid. It is simple to quote but costs more than it appears: 12% flat over a year is roughly a 21.5% reducing balance rate.
On a 1,000 loan at 12% flat for 12 months, interest is 120, the total repayable is 1,120 and each installment is 93.33. The borrower is charged interest on the full 1,000 in the last month even though only about 83 of principal remains, which is why the real cost is so much higher than the label.
Flat rate is popular for small consumer and microfinance loans because it can be computed by hand. If you use it, disclose the total repayable and, where required, an effective rate, so borrowers can compare it fairly with reducing balance offers.
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