Interest based on original principal
The calculation uses the original amount over the specified tenure.
BORROWING BASICS
Flat rate or reducing
balance?
Learn how the calculation method affects the way interest is estimated.
Flat-rate interest
Under a flat-rate calculation, interest is calculated on the original principal for the agreed period, even as instalments repay that principal over time. This can make the quoted rate look lower than a reducing-balance rate with a similar repayment cost.
Reducing-balance interest
Under a reducing-balance calculation, interest is generally calculated on the outstanding principal. As the principal is repaid, the balance on which interest is calculated declines.
Interest based on outstanding balance
The interest component changes as the principal balance falls.
What should you compare?
- Total repayment over the full tenure
- Processing fees and other applicable charges
- Prepayment, foreclosure and late-payment terms
- Whether the quoted annual rate is flat or reducing-balance
- The lender's official repayment schedule
Rates calculated using different methods are not directly equivalent. Ask the lender for the full repayment schedule and all applicable charges before committing.
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