Reducing Interest vs Flat

Flat, compounding or reducing interest can drastically change how much interest you are actually paying especially for a loan with a long period. For example, a $100,000 (P) loan at 3% p.a (I) with just a 5 years (n) tenure calculated using the 3 methods can cause you to pay more than double the interest amount if not careful:

For a Flat interest rate loan, the interest you have to pay is simply 3% x 5 years. Thus it's also called simple interest. 

For, a reducing-interest rate loan, the next calculation is on the principal balance outstanding and not the initial principal amount. In the 1st year, you pay interest of 3% and therefore $3,000. But in the 2nd year, your principal would have been reduced to $80,000 (calculators, where the payment is made at the beginning of the month/period vs end of the month, will show some slight difference or due to rounding) and 3% interest on it would be $2,400 and so on if it is based on yearly servicing. If it is based on monthly servicing, it would be the same method :  (3%p.a / 12 months) x the reduced principal that month.

On your dashboard, we will convert any reducing interest to simple/flat so that it is easier for you to compare apple to apple. Simple interest is used on your dashboard instead of reducing as most banks and lenders communicate in simple interest plus it is also easier to calculate the total interest, even though it may appear more expensive. However, please note on the actual term sheet/loan agreement, if they are used to communicating in reducing interest instead, they may revert to that. Your total interest should remain the same as it is simply their preferred method of communicating interest rates internally or externally or if required by law. You can also double-check the amounts again by using our loan calculator.