Money · Tool

Flat rate or reducing rate?

A "4% flat" loan is not a 4% loan. Enter a loan and see both kinds of rate side by side: the monthly payment, the total interest and the true rate.

The rate you were quoted is
Flat: interest is charged on the full amount for the whole term, even as you pay it back. Reducing: interest is charged only on what you still owe.

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Why the flat rate looks cheaper

You pay interest on money you already returned

With a flat rate, every month you pay interest on the whole original loan. Halfway through, you owe half, but the interest stays the same.

Roughly double

Over a few years, the true (reducing) rate of a flat loan is close to double the flat number. Always compare loans on the reducing rate.

Ask for the equivalent rate

UAE Central Bank rules say a bank that advertises a flat rate must show the equivalent reducing (effective) rate next to it. If you only see a flat rate, ask for it.

The 50% limit

Under UAE Central Bank rules, all your monthly loan and card repayments together must not exceed 50% of your gross salary and regular income. Personal loans have a maximum term of 48 months.

This calculator leaves out fees, insurance and early settlement charges, which add to the real cost. It is not financial advice.

Sources: Central Bank of the UAE, Regulations Regarding Bank Loans and Other Services Offered to Individual Customers (2011), Article 6 (interest on a reducing balance; any bank advertising a "flat" rate must state the equivalent effective rate side by side), Article 7 (repayments not above 50% of gross salary and other regular income; personal loans up to 48 months), as published in the CBUAE Rulebook (rulebook.centralbank.ae); CBUAE Consumer Protection Standards on disclosing how payments are split under the reducing balance method. Formulas: flat interest = amount × rate × years; reducing payment = standard amortisation formula with monthly rate = yearly rate ÷ 12; the equivalent reducing rate is found numerically. Not financial advice.