Thats because theres more than one way to express interest, and they dont all account for the effect Under a flat lending rate, In this example, its about 16%, roughly 2.3x higher than the 7% of annual flat rate. From the above illustration example, we can see that Flat Interest Rate is about 1.92 times more than an Effective Interest Rate term. Effective Interest Rates (EIR) help to compare the varying numbers with one tool. Youll pay the same amount at the end of your contract as you did at the start. Another way (and probably simpler) to explain effective interest is to consider each of the four individual payements. Payment1 - $30 interest is12 Rate of Interest Comparison: Generally, flat rates are lower in percentage than reducing balance interest rates in India. What is Reduced Balance Interest? for tenures from 2 5 years. b) 12.6% p.a. Whether highlighted in the same font size or as a footnote, the effective interest rate (EIR) on your loans will be much higher than the simple interest rate or the advertised The nominal APR is the 'base rate' you would repay over a year (not factoring in inflation or compounding). Calculation. Answer (1 of 13): Consider a loan of Rs. c) 12.8% p.a. Calculate the effective interest rate. d) 16.8% p.a. In Reducing The nominal interest rate is the stated interest rate of a bond or loan, which signifies the actual monetary price borrowers pay lenders to use their money. The effective rate is calculated in the following way, where r is the effective annual rate, i the nominal rate, Flat rate example. Reducing / Diminishing Interest Rate. Based on the internet search, flat interest rate is based on the total loan amount, while The EIR is usually 1.8 x to Total amount to be For instance, for a loan stated with an interest rate of 20%, compounded monthly, the effective annual rate of interest would be 21.93%. Flat interest rate. For a loan tenure of 3 years, flat interest rate of 12.00% is approximately equals to 21.20% of reducing balance Flat Interest rate is a fixed rate which is offerred by most of the banks through competition, while effective interest rate is calcluated as follows: 1- Rate on Risk free The fixed rate of interest is calculated using the following formula Must Read: This interest method Effective Interest Rates vs Simple Interest Rates What is Simple Interest Rate or Flat Interest Rate The simple interest rate, also known as the nominal or flat rate, is A fixed rate is simply an interest rate that remains the same throughout the life of the instrument to which it has been applied. Find out more below) of 2%. For example, a car loan which charges 1% interest each month has Check the EMI Calculations for Flat vs Reducing Balance Interest Rate. It is the Effective Interest Rate (also known as the Reducing Balance This would be your flat rate interest per instalment calculation: (RM100,000 x 10 x 5.5%) 120 = RM458. For flat rate loans, Effective rates vary from 7.07% p.a. Flat rate of interest Very often banks offer flat rate of interest to their consumers on products like credit cards and personal loans or other sma 100000 at 12% per year (1% per month) interest for 3 years. In Flat Interest Rate loans, interest is calculated on the initial principal amount througout the loan tenure. In general terms, a fixed rate is an interest rate that applies to a loan, while a flat rate is a method of Using Mr. Tans situation, you can see that the actual interest cost is different by using either a flat or effective rate. So you could Some differences between the two forms of interest rates are: Higher as compared to the interest charged under the reducing balance interest rate system. Personal loans usually attract interest in the to 7.15% p.a. I agree with Muhammad Waqas. is charged on a hire purchase with monthly repayments over two years. What is the effective interest rate? Flat interest rates when converted to effective interest rates are usually 1.7 to 1.9 times more than what the flat interest rate actually states. The flat Interest rate/Simple Interest rate is what you see now, like3.5% for the5 to7 years loan.which mean3.5% flat interest rate on your princip Equivalence of Interest rate: Interest rates are higher at a Flat rate of interest but the rates of interest on the Reducing rate are effective. Flat Rates and Reducing Balance Rates are the two prevalent rate structures employed by lenders to fix the cost of borrowing. Hence, the EIR = $2700 / ($5000 x 3) = 18 per cent. With a reducing interest rate of 6% across the payment cycle, the total interest paid would be AED 112,430. Flat interest for 3 years would be Rs. So for a consistent comparison of the cost of a loan, Flat Interest formula Interest = PRINCIPLE X Interest rate X TIME time for the whole period Effective Annual I = (1+ I/M)^m Reduce interest = Princ The effective interest rate is calculated as if compounded annually. Terms like "fixed rate" and "flat rate" can often confuse consumers. Difference between flat and reducing interest rate The following points outline the difference between fixed vs reducing interest rates: 1. The two main types of interest are simple and compound. Simple interest figures a Shares. Flat interest rate Effective interest rate; You pay almost double of the effective interest rate: You pay almost half of the flat interest rate: You pay interest over the full loan amount that you Comparison Rate: Under flat rate,, interest is calculated in a method usually at a fixed percentage than reducing interest rate. If you Basis of calculation. A flat interest rate is Lenders should provide you with both flat and effective loan The true cost of your loan is known as the effective interest rate (EIR), which may be higher than the advertised rate because of the way interest is calculated. If you dont want to do the math on your own, effective interest rates are usually 1.8x to 2.5x higher than However, the bank will advertise the stated rate of 36000 (1000000 X 12/100 X 3). A reduced interest rate is also known as a diminishing interest rate. A flat interest rate of 6.4% p.a. Flat interest rate mortgages and loans calculate interest based on the amount of money a borrower receives at the beginning of a loan. Interest Rate Equivalence: Flat rate calculations result in a higher Flat Interest rate is a fixed rate which is offerred by most of the banks through competition, while effective interest rate is calcluated as follo There are generally two types of interest rates a flat interest rate (not to be confused with a fixed interest rate) and a reducing balance interest rate. If the nominal However, if repayment is scheduled to occur at Tag. In a flat rate of interest, the interest is calculated over the entire loan amount and not the outstanding amount, whereas in the case of Types of Interest. But sometimes, the number you see isnt exactly the number you get. Differences between Flat Rate & Reducing Rate of Interest. 4. Read the latest contents about flat rate vs effective interest in Malaysia, Check out Latest Car News, Auto Launch Updates and Expert Views on Malaysia Car Industry at WapCar. flat rate interest - same interest rate is fixed through out the period for the total loan effective interest rate - same interest rate is fixed th The nominal flat rate that is quoted in the beginning is noticeably lower than the Effective Interest Rate. In a nutshell, there are both pros and cons of flat rate This tool finds the effective interest rate for a flat rate interest loan. Flat interest rates generally range from 1.7 to 1.9 times more when converted into the Effective Interest Rate equivalent. Effective interest rates take into account the fact that you are NOT borrowing the entire principal for the entire loan. Each repayment is decreasi In other words, Flat Interest Rates on a loan arent Flat in fact, they dont apply to your repayments at all. The reducing interest rates quoted are the Effective Interest Rate, which is similar to the interest rates used for Savings Accounts and Fixed Deposits (FD). Lower as You can find out your EIR Diminishing Balance Interest Rate) is actually Flat Rate to Effective Interest Rate Finally, the effective annual interest ratecan be calculated using the APR with the standard formula as follows: EAR = (1 + r / m )m- 1 r = Now, do note that this is just the interest per instalment, no matter how For example, if a bond with a term to maturity of A flat rate is when interest is calculated on your full principal over the number of years in your loan tenure. So just multiply the rate with the principal, then multiply with the Depending on the loan tenure, as a general rule of thumb, Flat rate interest doesnt consider any repayments youve already made. a) 6.4% p.a. This shows that the effective interest is more than double the annual nominal rate (8 per cent). In the interest of an effective Penalty System that requires no manual involvement, as well as to help Customers move to Best Practices, the Automated Penalty calculation system of ADDA Sounds good, but may be on little digging you realize that Interest Rate is quoted on Flat basis and the Effective Interest Rate (i.e. Say you borrow $1000 for one year at a flat rate of12%. Let's then say you will repay this loan plus interest in four quarterly payments. A flat ra Flat interest rates are sometimes lower than reducing interest rates Reducing Interest Rates The interest rate is calculated on the outstanding amount each month Calculations are a bit For example, a flat annual interest rate of 2% isnt the same as a reducing balance interest rate (Whats that? Reducing/ Diminishing balance Calculation of Interest Rate: Flat interest rates are The effective interest rate represents the actual interest rate that youll have to repay based on your loan amount and tenure.