Loans & Credit

What Is a Flat Interest Rate?

A flat interest rate is charged on the full original loan amount for the entire term, even though the borrower repays part of the loan each month. Because interest never falls as the balance shrinks, a flat rate costs considerably more than a reducing balance rate with the same headline number.

How a Flat Rate Is Calculated

Total interest = principal × annual flat rate × number of years. The installment is (principal + total interest) ÷ number of months.

Flat Rate vs. Reducing Balance Rate

With a reducing balance rate, interest is charged only on the amount still owed, so it falls with every payment. A 10% flat rate on a three-year loan is roughly equivalent to an effective reducing rate of about 18% per year.

Where Flat Rates Are Used

Flat rates are common in car loans, consumer financing, and microfinance in many countries. Comparing loans by their effective rate or APR, rather than the headline rate, shows their true relative cost.

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🔗 Related Terms

Reducing Balance Rate EMI (Equated Monthly Installment) APR (Annual Percentage Rate) Simple Interest

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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.