Why a Flat-Rate Loan Costs More Than the Number on the Offer

One finance offer says "5% flat rate." Another says "7% reducing balance." At first glance, the smaller number looks clearly cheaper. But these two figures are not measured the same way at all, and once you convert them onto the same basis for comparison, you may find the offer with the "smaller" rate is actually the more expensive one, not the other way around.

Why a flat rate and a reducing rate cannot be compared directly

On a reducing balance, profit is calculated on whatever balance actually remains each month, so as you pay down part of the amount, the profit charged on the remainder in later months shrinks along with it. A flat rate, by contrast, is calculated on the full original finance amount for the entire repayment period, even after a large share of it has already been paid off. This difference in how the calculation works is exactly what makes a small-looking flat rate equivalent to a much larger reducing rate than the number printed on the offer suggests — because the base the flat rate is calculated on never shrinks throughout the term.

What a loan calculator does, and why it helps

The loan calculator works out the monthly instalment, the total profit, and a month-by-month repayment schedule, whether the offer is on a reducing balance or a flat rate — and, importantly, converts a flat rate into its reducing-balance equivalent, giving you one comparable number regardless of how each offer presents its rate. Instead of comparing two mismatched figures and assuming the smaller one is cheaper, you get an actual apples-to-apples basis for comparison.

How large is the gap between the two rates in practice

The gap between a flat rate and its reducing equivalent is not fixed — it grows the longer the finance term runs, because the flat base stays un-reduced for longer. A 5% flat rate offer can be equivalent to a reducing rate close to 9%, which means comparing the two printed numbers directly, without converting them onto the same basis first, can lead to a completely wrong financial decision.

Steps to use it

1. Open the loan and instalment calculator and enter the finance amount and the repayment term.
2. Select the rate type you were quoted: flat or reducing balance, exactly as stated in the finance offer.
3. Enter the rate as given in the offer without adjusting it.
4. Review the monthly instalment and total profit, and if the offer is flat-rate, check its reducing-balance equivalent for comparison against other offers.
5. Repeat for every offer you are comparing, and always use the reducing-balance equivalent as your final basis for comparison.

A real case

Someone shopping for personal finance received two offers: one from a conventional lender at a 7% reducing rate, another from a different provider marketing its offer at just a 5% "flat" rate. Comparing the two figures directly, he concluded the second offer was clearly cheaper, and nearly signed based on that surface-level comparison.

Before signing, he entered both offers' details into the loan calculator. It showed the monthly instalment and total profit paid over the term for each, and converted the 5% flat rate into its reducing equivalent — which turned out to be actually higher than the first offer's 7% reducing rate. The monthly instalment on the seemingly "cheaper" offer was in fact higher, and the gap in total profit paid over the finance term was large enough to change his decision entirely.

Frequently asked

Why is a flat rate marketed with a smaller number in the first place?

Because the smaller number looks more attractive without explaining that its calculation basis is fundamentally different from a reducing rate — which is exactly why converting both numbers onto the same basis before comparing is necessary, not optional.

Is a reducing rate always the better deal?

Not necessarily as an absolute rule, but comparing two offers fairly only works once any flat rate has been converted to its reducing equivalent first. The calculator performs this conversion automatically so you compare on the right basis, not just the printed number.

What does the month-by-month repayment schedule show?

The schedule shows how much of each monthly instalment goes toward the original amount and how much goes toward profit — a split that changes every month on a reducing balance, while staying nearly constant throughout the term on a flat rate.

Can the calculator be used for car finance or general personal finance?

Yes, the calculator works for any finance with a fixed monthly instalment and a set term, regardless of its purpose, as long as you know the finance amount, the term, and the quoted rate.

Does the calculator also handle real estate finance?

For real estate finance specifically, where both a property-value limit and an income limit determine the maximum possible amount together, the dedicated real estate finance calculator is built for that exact case.

Try the tool

Open the loan and instalment calculator, enter the details of any finance offer you are comparing, and get the monthly instalment, the repayment schedule, and the reducing-rate equivalent before you sign anything.