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Flat rate vs reducing rate calculator
Many UAE car and personal loans are quoted at a "flat" rate. This shows the reducing rate it really equals, so you can compare offers fairly.
What is the difference?
With a flat rate, interest is charged on the full loan amount for the whole term, even though you repay part of it every month. With a reducing rate (also called reducing balance), interest is charged only on what you still owe, so it falls month by month.
For the same monthly payment, the reducing rate is almost twice the flat rate. A 3.5% flat rate over four years equals about 6.5% on a reducing basis.
Example
AED 100,000 at 3.5% flat for 4 years: interest is 100,000 × 3.5% × 4 = AED 14,000. You repay AED 114,000 over 48 months, or AED 2,375 a month. The same payment on a reducing basis works out to about 6.5% a year.
Questions people ask
Which is better, flat or reducing?
Compare them on the same basis. A reducing rate is the true annual cost of borrowing. Convert any flat rate before comparing it with a reducing-rate offer.
How do I compare two loan offers?
Convert both to a reducing rate, then compare the total repaid, including processing fees and insurance the bank adds.
Does paying early help on a flat rate loan?
Early settlement fees in the UAE are capped at 1% of the outstanding amount or AED 10,000, whichever is lower. Check how much of the remaining interest is waived.