Loans & credit
Reducing vs flat interest rate
Reducing rate charges interest on the shrinking balance; flat rate charges on the full amount throughout.
In a reducing-balance loan, interest is calculated on the outstanding principal, which falls each month, so you pay less over time.
In a flat-rate loan, interest is charged on the entire original amount for the whole tenure, which is far more expensive.
A flat rate of 10% is roughly equal to a reducing rate of nearly 18%. Lenders quote flat rates to make loans look cheaper than they are.
For example
A dealer advertising a 7% flat car loan may actually be charging you an effective reducing rate closer to 13%. Always ask for the reducing rate.