Tools · Flat vs reducing balance
Flat vs reducing balance interest calculator
A flat rate and a reducing balance rate that look the same on paper can cost very different amounts. Enter one loan and see both, side by side, with the real annual cost of each.
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Enter a loan amount, a quoted annual rate, a number of installments and how often they are paid. The calculator shows the payment, total interest and real annual cost of the same loan on a flat rate basis and on a reducing balance basis, so you can see how much more a flat rate costs.
| Flat rate | Reducing balance | |
|---|---|---|
| Payment each period | 93.33 | 88.85 |
| Total interest | 120.00 | 66.19 |
| Total repaid | 1,120.00 | 1,066.19 |
| Real annual cost (APR) | 21.46% | 12.00% |
On the same quoted rate, the flat rate loan costs 53.81 more in interest (81% more), and its real annual cost is about 1.79 times the quoted rate.
Figures are rounded to two decimals. This calculator is an illustration, not a loan offer.
Why the same rate costs different amounts
On a flat rate loan, interest is calculated once on the original principal for the whole term, however much has already been repaid. On a reducing balance loan, interest is charged only on the principal still owed, so it falls with each payment. For a 1,000 loan at 12% over 12 months, flat rate interest is 120, while reducing balance interest is 66.19.
The difference matters because borrowers and lenders often quote both as "12%". The honest comparison is the real annual cost: the reducing balance rate that would produce the same payments. For 12% flat over 12 months that is about 21.5%, roughly 1.8 times the quoted figure. The flat rate vs reducing balance guide explains this in detail.
Equivalent reducing balance rates for common flat rates
The table shows the reducing balance rate (a nominal annualized figure) that is equivalent to a flat rate, for monthly installments. It is generated with the same calculation as the calculator above.
| Flat rate (per year) | 6 months | 12 months | 24 months |
|---|---|---|---|
| 6% | 10.2% | 10.9% | 11.1% |
| 10% | 16.9% | 18.0% | 18.1% |
| 12% | 20.3% | 21.5% | 21.6% |
| 15% | 25.3% | 26.6% | 26.6% |
| 18% | 30.2% | 31.7% | 31.5% |
| 24% | 40.0% | 41.7% | 40.9% |
How to use the result
If you are a borrower, compare offers by total repaid and real annual cost, not by the quoted rate. A 15% flat offer is roughly a 26.6% reducing balance loan over 12 months, so it is dearer than a 24% reducing balance offer.
If you are a lender, know what your flat rate really charges, and disclose the total repayable and, where required, an effective rate. If you offer both methods, keep them as separate loan products with clear names. See how to calculate loan interest and the effective interest rate guide.
Frequently asked questions
Is flat rate or reducing balance cheaper?
Reducing balance is cheaper for the borrower at the same quoted rate, because interest is charged only on the principal still owed. A flat rate loan costs roughly 1.7 to 1.8 times more in real terms on typical terms.
How do I convert a flat rate to a reducing balance rate?
Work out the installment from the flat calculation, then find the periodic rate at which that installment repays the principal. This calculator does it for you and shows the result as the real annual cost.
Why is the real annual cost higher than the flat rate?
Because on a flat rate loan the borrower is charged interest on the original amount for the whole term, even though they repay principal every period and so hold less and less of the money.
Does the calculator include fees?
No. Use the full loan calculator, which lets you add a processing fee, deducted or added to the loan, and shows its effect on the real annual cost.
Related guides and tools
- Loan calculatorPayments, total interest and real cost, with a fee option.
- Flat rate vs reducing balance interestThe full comparison, with a worked example.
- Effective interest rate on flat rate loansHow to calculate the true cost by hand.
- Flat rate interestDefinition and example.
- Reducing balance interestDefinition and example.
- Loan origination softwareSet the interest method per loan product.
Calculators show one loan. LoanTabs builds the schedule for every loan you make, applies each payment and keeps the books in step.
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