Flat Rate vs Effective Interest Rate


flat rate vs effective interest rate

Interest rates ? 

Interest rate simple the amount percentage of money that lender or bank charges when lending money to lender. This rate is often calculated p.a. (per annum) basis while the repayment is often done on monthly basis.


Flat rate

Flat rate is commonly used in personal financing packages in Malaysia. Flat rate is one of the easiest way to calculate interest. This method has been traditionally used however it has been phased off in developed countries as it does not reflect the true amount of interest based on what is owed.

To understand flat rate, lets take an example of a borrower with access of RM 4,000 loan for 1 year at 10% (flat) p.a. The repayment per monthly would be RM 4,000 + RM400/ 12 months = RM 366.667 for 1 year. The borrower will be paying the same interest rate the whole tenure irregardless of the amount he owns.

Do understand that flat interest rate, although being lower in terms of percentage is almost doubled is terms of it’s real interest rate. This commonly refers to EIR ( Effective Interest rate). Although most personal loans interest are displayed in flat rate , fortunately some are required to display EIR. You will have to look harder at the product brochures to know the effective interest rate of the personal loan.


Common Use of Flat interest rate

  1. Personal loan
  2. Car loan


Reducing balance

Not to be mistaken with Fixed rate. Reducing balance interest rates are often use in mortgages, credit card loans in Malaysia.