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Flat rate vs reducing balance
Two lenders quote the same 10%. One charges it on the original amount for the whole term, the other only on what is still owed — and the borrower pays almost twice as much interest to the first. Enter one set of terms below to price the loan both ways at once.
Loan terms
One set of terms, priced both ways. There is no method to pick — that is the comparison.
Extra interest under a flat rate
ZAR 450.09
That is 81.85% more interest for the same 10.00% headline rate — money the borrower pays for a balance they have already repaid.
| Measure | Flat rate | Reducing balance |
|---|---|---|
| Each instalment | ZAR 916.67 | ZAR 879.16 |
| Number of payments | 12 | 12 |
| Total interest | ZAR 1,000.00 | ZAR 549.91 |
| Total repaid | ZAR 11,000.00 | ZAR 10,549.91 |
| Effective interest rate | 19.53% | 10.47% |
| APR (nominal annual) | 17.97% | 10.00% |
The same price, quoted honestly
- A 10.00% flat rate costs the borrower exactly what a 17.97% reducing-balance rate would.
- To collect what a 10.00% reducing-balance loan collects, you would quote 5.50% flat.
There is no fixed multiplier between the two. The gap depends on the term and how often the borrower pays, which is why it has to be calculated rather than estimated.
A comparison of interest methods, so fees are left out — a fee costs the same under either method. To fold origination and per-instalment charges into the true rate, use the effective interest rate calculator.
Where the two methods separate
Interest charged on each instalment. A flat rate never moves; a reducing balance falls as the debt is paid down. The shaded gap is the difference.
- Flat rate
- Reducing balance
Show the full side-by-side scheduleHide the schedule
| # | Interest (flat) | Interest (reducing) | Balance (flat) | Balance (reducing) |
|---|---|---|---|---|
| 1 | ZAR 83.33 | ZAR 83.33 | ZAR 9,166.67 | ZAR 9,204.17 |
| 2 | ZAR 83.33 | ZAR 76.70 | ZAR 8,333.33 | ZAR 8,401.72 |
| 3 | ZAR 83.33 | ZAR 70.01 | ZAR 7,500.00 | ZAR 7,592.57 |
| 4 | ZAR 83.33 | ZAR 63.27 | ZAR 6,666.67 | ZAR 6,776.69 |
| 5 | ZAR 83.33 | ZAR 56.47 | ZAR 5,833.33 | ZAR 5,954.00 |
| 6 | ZAR 83.33 | ZAR 49.62 | ZAR 5,000.00 | ZAR 5,124.46 |
| 7 | ZAR 83.33 | ZAR 42.70 | ZAR 4,166.67 | ZAR 4,288.00 |
| 8 | ZAR 83.33 | ZAR 35.73 | ZAR 3,333.33 | ZAR 3,444.58 |
| 9 | ZAR 83.33 | ZAR 28.70 | ZAR 2,500.00 | ZAR 2,594.12 |
| 10 | ZAR 83.33 | ZAR 21.62 | ZAR 1,666.67 | ZAR 1,736.58 |
| 11 | ZAR 83.33 | ZAR 14.47 | ZAR 833.33 | ZAR 871.89 |
| 12 | ZAR 83.33 | ZAR 7.27 | ZAR 0.00 | ZAR 0.00 |
Why the gap is so wide
The two methods answer the same question differently: what, exactly, is the borrower paying interest on?
- 1
Flat charges on money already repaid
A flat rate applies the full rate to the original amount for every period of the term. In the final instalment the borrower may owe a tenth of the loan, but is still charged interest on all of it — so roughly half the interest buys nothing.
- 2
Reducing balance follows the debt down
Interest is recalculated each period on what is actually outstanding. Early payments are mostly interest, later ones mostly principal, and the charge falls as the balance does. It is the method behind most bank loans and mortgages.
- 3
The headline number hides all of it
Both loans can advertise the same percentage. Nothing in the quoted figure tells a borrower which method applies, which is why comparing two offers on the headline rate alone is meaningless.
Which method should you use?
Flat rates are not dishonest in themselves — they are simple to administer and easy for a borrower to hold in their head. The problem is quoting one as though it were the other.
| Which method should you use? | Flat rate | Reducing balance |
|---|---|---|
| Interest is charged on | The original amount, every period | Only the balance still outstanding |
| Instalment size | Equal, and simple to explain | Equal too, but split shifts from interest to principal |
| Early settlement | Awkward — interest was priced for the full term | Natural; the borrower simply stops accruing |
| Typically used by | Microfinance, asset finance, payroll and group lending | Banks, mortgages, most regulated consumer credit |
| Regulatory disclosure | Usually requires the effective rate alongside it | Generally maps directly to the disclosed rate |
If you quote flat, quote the effective rate next to it. Borrowers increasingly compare offers on effective rates, and in most markets regulators now require it.
Questions about flat and reducing rates
- For the borrower, reducing balance is always cheaper at the same quoted rate — often by close to half over a one-year term. For the lender, a flat rate is simpler to administer and yields more at the same headline number, which is precisely why it is common in microfinance. Neither is wrong to use; quoting a flat rate without disclosing what it actually costs is the problem.
- There is no single multiplier, because the answer depends on the term and the payment frequency. A common rule of thumb is that a flat rate on a loan repaid in equal instalments over one year is close to double the equivalent reducing-balance rate — but that only holds for that one shape of loan. Enter your terms above and read the equivalent rate directly.
- Mostly for simplicity. A flat rate produces a round, unchanging instalment that a loan officer can calculate by hand and a borrower can remember, which matters where loans are small and administered in the field. The trade-off is that it obscures the real cost, so most regulators now require the effective rate to be disclosed alongside.
- In most markets, yes — what is regulated is disclosure, not the method. Lenders are typically required to state the effective annual rate or an APR calculated to a prescribed formula, whichever interest method they use internally. Check your own regulator, because the prescribed calculation and the treatment of fees vary.
- No, deliberately. A fee costs the same under either method, so including it would widen both columns without changing the comparison. To see what origination and per-instalment charges do to the true rate, use the effective interest rate calculator.
- No. The whole calculation runs in your browser. Nothing you type is sent to a server, saved, or logged, and there is no sign-up.
Which is better, flat rate or reducing balance?
How do I convert a flat rate to a reducing balance rate?
Why do microfinance lenders quote flat rates?
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Price both ways, on every loan you write
Lendbox handles flat and reducing-balance products side by side, builds the schedule, discloses the effective rate and tracks what is actually owed — across your whole book, not one loan at a time.
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