Instantly convert flat and simple interest rates to the equivalent effective interest rate using this nifty calculator.
The flat interest rate is mostly used for personal and car loans. A flat interest rate is always a fixed percentage. For example:
Imagine you applied for a personal loan of RM100,000 at a flat interest rate of 5% p.a. with a tenure of 10 years.
In this case, you will be paying 5% interest every year on the RM100,000 loan that you’ve taken. Even if you have already paid RM90,000, the interest rate of 5% will still be on the entire total loan that you’ve taken, which was RM100,000.
You will end up paying RM50,000 just for the interest for that whole 10 years tenure (RM100,000 * 5% * 10) = RM50,000
The effective interest rate is the same as the reducing balance method. After each instalment, you will only need to pay interest over the remaining amount. This means that the payment for your interest will decrease after each time you pay a part of your loan.
In short, a loan with an effective interest rate has a lower total payment for interest. Let’s use the example below to understand it better:
Imagine that you’ve applied for a personal loan of RM100,000 at an effective interest rate of 5% p.a. with a tenure of 10 years.
That 5% interest rate will only be charged on the remaining balance of your personal loan, which means you’ll be paying less in interest every time you pay your personal loan installment. At the end of the 10 year tenure, you will only be paying RM 27,300 in interest, almost half of the total interest paid for our flat interest percentage example above!
There are a few differences between the flat and effective interest rate. Here’s some of them:
|Flat interest rate||Effective interest rate|
|You pay almost double of the effective interest rate||You pay almost half of the flat interest rate|
|You pay interest over the full loan amount that you applied for||You pay interest over the remaining loan amount|
|Fixed amount of interest payment||A decreasing amount of interest payment|
You should use the Flat to Effective Interest Rate Calculator so you can understand the actual interest payment per month that you will pay to your lender. For instance, if you compare a flat interest rate with an effective interest rate and you don’t know what the difference is between those two, you would probably choose the flat interest rate as it’s often advertised at a (seemingly) lower percentage.
However, over a longer period of time, a flat interest rate can cost you way more than an effective interest rate would. This information is very important to help you save a lot of money in the long run.
By calculating your effective interest rate, this calculator gives you your monthly instalment, your total payment, and your effective interest rate. These details are very useful for when you are searching for the right loan. This calculator basically provides you with valuable information that gives you more certainty when searching for the right loan product.
The reducing balance method is a way to calculate how much interest you are going to pay and how high your principal amount will be. The effective interest rate is a type of interest rate.