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Flat vs Reducing Interest Rate Calculator

Work out flat vs reducing interest rate instantly with clear inputs, formula shown and shareable results.

About Flat vs Reducing Interest Rate Calculator

A flat rate charges interest on the original principal for the entire term, ignoring repayments. Solving for the reducing-balance rate that produces the same instalments shows the flat quote is worth roughly 1.8 times its stated value on a short term.

Formula

Flat versus reducing

Flat interest = P × rate × years; solve r in P = Σ instalment/(1+r)^t

Worked example

With the default values below, Flat vs Reducing Interest Rate Calculator returns Equivalent Reducing-Balance Rate of 14.548%. Change any input above and every figure here is recalculated in your browser.

Inputs used

Loan Amountminimum 0
500,000
Quoted Flat Rateaccepts 0–40 %
8 %
Term In Yearsaccepts 0.5–10
3

Results

Equivalent Reducing-Balance Rate
14.548%
Monthly Instalment
$17,222.22
Interest Under The Flat Method
$120,000.00
Extra Cost Versus The Same Reducing Rate
$55,945.42

Step by step

  1. 1Values used
  2. 2Flat versus reducing
  3. 3Equivalent Reducing-Balance Rate= 14.548
  4. 4Monthly Instalment= 17,222.22
  5. 5Interest Under The Flat Method= 120,000.00
  6. 6Extra Cost Versus The Same Reducing Rate= 55,945.42

Assumptions and limits

  • The result is derived only from the 3 inputs listed above. Anything not among them is not part of the calculation.
  • In particular, this calculator does not take inflation, tax, fees or charges or compounding frequency into account.
  • Figures are rounded for display to 3 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
  • Figures are estimates. Lenders apply their own rounding, fees and eligibility rules, and rates change. This is not financial advice — confirm the numbers with your lender.
  • This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Figures are estimates. Lenders apply their own rounding, fees and eligibility rules, and rates change. This is not financial advice — confirm the numbers with your lender.

Frequently Asked Questions

Roughly how do the two compare?

For a level-instalment loan the reducing-balance equivalent is close to 1.8-1.9 times the flat rate.

Why is the flat method still used?

It is simple to compute and quote, which is also what makes it easy to misread.

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