1. What is Reducing vs Flat Rate Interest?

Reducing balance interest is calculated on the outstanding principal amount, which decreases over time as you make payments. Flat rate interest is calculated on the original principal amount throughout the entire loan tenure, regardless of payments made.

2. How Does the Calculator Work?

The calculator uses two different formulas:

Where:

• Principal — Original loan amount ($)
• Rate — Annual interest rate (decimal)
• Tenure — Loan period in years

Explanation: The reducing balance method typically results in lower total interest paid compared to the flat rate method for the same principal, rate, and tenure.

3. Importance of Interest Calculation

Details: Understanding the difference between reducing and flat rate interest is crucial for making informed financial decisions, especially when comparing loan options or investment returns.

4. Using the Calculator

Tips: Enter the principal amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), and tenure in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Which method results in lower interest payments?
A: The reducing balance method typically results in lower total interest payments compared to the flat rate method for the same loan parameters.

Q2: When is flat rate interest commonly used?
A: Flat rate interest is often used for short-term loans, personal loans, and in some car financing arrangements.

Q3: What are the advantages of reducing balance interest?
A: Reducing balance interest benefits borrowers as they pay interest only on the outstanding principal, leading to lower overall interest costs.

Q4: How does loan tenure affect the interest difference?
A: The longer the loan tenure, the greater the difference in total interest paid between reducing and flat rate methods.

Q5: Which method is better for comparing loan options?
A: The reducing balance method provides a more accurate representation of the true cost of borrowing and is recommended for comparison.