How it is calculated
Reducing balance: interest is charged each month on the balance you still owe. The fixed monthly payment is loan × r ÷ (1 − (1 + r)^−months), where r is the annual rate ÷ 12.
Flat rate: interest is charged on the original amount for the whole tenure.
- Interest = loan amount × annual rate × number of years
- Total repayment = loan amount + interest
- Monthly payment = total repayment ÷ number of months
For both methods, total repayment = monthly payment × number of months, and total interest = total repayment − loan amount.
Worked example
A RM50,000 loan at 5% per year over 5 years (60 months):
Reducing balance
- Monthly payment: RM943.56
- Total repayment: RM943.56 × 60 = RM56,613.70
- Total interest: RM6,613.70
Flat rate
- Interest: RM50,000 × 5% × 5 = RM12,500
- Total repayment: RM62,500
- Monthly payment: RM62,500 ÷ 60 = RM1,041.67
Why your number may differ
A flat rate and a reducing-balance rate cannot be compared directly. A 5% flat rate costs far more than 5% reducing balance, as shown above.