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Flat Rate Loan Formula:
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Flat rate interest is a method of calculating interest where the interest is charged on the original principal amount throughout the loan term, regardless of the reducing balance. This method is commonly used in personal loans in Malaysia and some other countries.
The calculator uses the flat rate interest formula:
Where:
Explanation: The total interest is calculated upfront based on the original principal, then added to the principal to determine the total repayment amount, which is divided equally over the loan term.
Details: Understanding flat rate interest helps borrowers compare different loan products and know exactly how much they will pay in total. It's particularly important in markets where this method is commonly used.
Tips: Enter the principal amount in USD, annual interest rate in decimal (e.g., 0.05 for 5%), and loan term in years. All values must be valid (principal > 0, rate > 0, term between 1-30 years).
Q1: How does flat rate differ from reducing balance rate?
A: Flat rate calculates interest on the original principal throughout the term, while reducing balance calculates interest on the outstanding balance, resulting in lower total interest.
Q2: Is flat rate more expensive than reducing balance?
A: Yes, for the same nominal rate, flat rate loans cost more because interest is calculated on the original principal even as you pay down the loan.
Q3: Where is flat rate interest commonly used?
A: It's commonly used in personal loans in Malaysia, Singapore, and some other Asian countries, as well as for some car loans.
Q4: How can I compare flat rate to reducing balance rate?
A: To compare, convert the flat rate to an effective interest rate (EIR) which will be higher than the stated flat rate.
Q5: Are there any advantages to flat rate loans?
A: The main advantage is predictability - you know exactly how much interest you'll pay from the beginning, making budgeting easier.