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TrustFinance Research Team
Oct 14, 2026
7 min read
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A flat loan rate applies to the original principal, while a reducing-balance calculation uses the principal still outstanding. The same advertised annual percentage can therefore produce different payments and interest. To compare quotes, align the net cash received, repayment dates and fees, then identify exactly what the rate label measures.
With flat interest, the original loan amount remains the calculation base even as principal is repaid. This does not mean the actual debt never decreases. The contract determines how payments are allocated and what remains due on early settlement. With reducing-balance interest, the periodic interest calculation instead uses the remaining principal.
Fixed and flat answer different questions. A fixed rate stays unchanged for a stated period; a floating rate can reset. Either description is separate from the principal base. Equal monthly instalments also do not prove a loan uses flat interest: an amortising reducing-balance loan can have level payments while its interest share falls.
The Bank of Thailand uses Effective Rate when explaining reducing-balance lending. Elsewhere EIR may label a disclosed loan-cost measure. Neither label automatically specifies the compounded annual mathematical calculation used below. MoneySense explains the interest bases and payment schedule, but simplified terminology must not replace an explicit period and annualisation rule.
Use generic currency units, not a real lender offer. Assume 12,000 is advanced at time zero and repaid in 12 equal monthly periods, with the first payment one full period later and every payment at period end. Both quoted rates stay constant. There are no fees in this first comparison.
Loan A charges 6% per year flat: interest is 12,000 × 0.06 × 1 = 720. Total instalments are 12,720, or 1,060 each month. Loan B charges 6% nominal per year on the remaining balance, divided into 12 monthly rates of 0.5%. Its equal-payment formula is A = P × r / [1 - (1 + r)^(-n)], with P = 12,000, r = 0.005 and n = 12.
| Measure | Loan A: flat | Loan B: reducing balance |
|---|---|---|
| Initial principal and net proceeds | 12,000.00 | 12,000.00 |
| Quoted rate | 6% per year on original principal | 6% nominal per year, divided by 12 |
| Monthly instalment | 1,060.00 | approximately 1,032.80 |
| Total instalments | 12,720.00 | 12,393.57 |
| Interest in the no-fee model | 720.00 | 393.57 |
Loan B’s unrounded payment is 1,032.797156... and gives a model total of 12,393.565878..., displayed as 12,393.57. The displayed 1,032.80 multiplied by 12 is 12,393.60, so it must not be presented as an exact route to the model total. Actual rounded schedules can adjust the last payment. No irregular dates, late payments, early settlement, insurance, taxes or variable-rate changes are modelled.
Now change only Loan A by withholding a mandatory upfront fee of 240 at disbursement. The face principal remains 12,000, but usable proceeds are 11,760. The 12 payments of 1,060 still total 12,720. The difference between those payments and net proceeds is 960: 12,720 - 11,760.
That 960 already captures the 240 fee through lower net proceeds. Adding the fee again would double-count it. This variant also supplies less usable cash than the original 12,000 example. It is a fee illustration, not a fair ranking of loans delivering equal net funding. If the required cash amount is the same, obtain quotes on that same net amount.
Let N be the net amount received, A the payment and i the monthly cashflow rate. Solve N = sum[A / (1 + i)^k] for months k = 1 to 12. The mathematical annual effective cost here is (1 + i)^12 - 1. These formulas account for the timing of the assumed cashflows, not just total interest divided by the face principal.
For the flat loan, the monthly rate is about 0.908032%; with the fee it is about 1.228401%. For the fee-free reducing-balance example it is 0.5%. The annual measures below use unrounded roots before rounding the final percentages. They are not certified statutory APR disclosures.
| Cashflow scenario | Net cash at time zero | Monthly cashflow rate | Mathematical annual effective cost |
|---|---|---|---|
| Flat, no fee | 12,000.00 | 0.908032% | 11.46% |
| Reducing balance, no fee | 12,000.00 | 0.5% | 6.17% |
| Flat, fee withheld | 11,760.00 | 1.228401% | 15.78% |
Multiplying a monthly rate by 12 gives a nominal annualisation, different from (1 + i)^12 - 1. US Regulation Z Appendix J(b)(1), for the closed-end credit it covers, specifies nominal annualisation of its unit-period rate. CFPB also explains that US mortgage APR includes relevant borrowing charges beyond interest. Neither statement makes this generic example a compliant US APR calculation.
ASIC’s Australian comparison-rate definition includes interest and most relevant fees and charges. It is another disclosure with its own scope and assumptions. Ask which jurisdiction, amount, term, fee inclusions and timing govern the rate in the actual quote. A locally used EIR, APR or comparison rate should not be silently substituted for our explicitly compounded mathematical measure.
No. Fixed concerns whether the rate changes. Flat concerns the original-principal calculation base. A fixed reducing-balance loan is possible.
No. The Bank of Thailand describes 1.8 as a rough shortcut. The actual cashflow rate depends on term, payment timing, fees and conventions. Use the actual schedule and a clearly named calculation.
No. It cannot establish affordability, suitability or early-settlement cost by itself. Compare compatible disclosures, actual cashflows and contractual conditions. No provider is recommended here.
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Read more educational guides on TrustFinance™ Blog.
This article provides general education, not a recommendation to borrow or select a lender. Actual rights, charges and disclosures depend on the entity, product, contract and jurisdiction. No approval or saving is guaranteed.
Sources checked on 14 October 2026. The figures above are editorial assumptions, not current bank pricing.
TrustFinance Research Team
Official TrustFinance research and editorial team, sharing insights, analysis, and best practices to help financial companies and traders build transparency, credibility, and growth.
