A ৳1 lakh loan for 1 year at 10% flat costs ৳10,000 in interest, but at 10% reducing only ৳5,499. So “10% flat” is really about 18% a year on a reducing basis. Enter your loan, rate and tenure below.
৳
= 1 lakh taka
%
years
= 12 months
Instalments
True yearly rate of the flat loan
18%
Quoted as 10% flat
Flat rate
৳9,167
12 monthly instalments
Total interest ৳10,000
Reducing rate
৳8,792
12 monthly instalments
Total interest ৳5,499
Total interest, flat rate
৳10,000
Total interest, reducing rate
৳5,499
Extra interest on flat
৳4,501
Effective rate with compounding
19.5%
A ৳1,00,000 loan for 1 year at 10% flat costs ৳10,000 in interest, but at 10% reducing it would cost ৳5,499. So this flat rate is really about 18% a year on a reducing basis.
Enter the loan amount. “1 lakh” or “1L” also works.
Enter the rate the bank, NGO or shop quoted.
Set the tenure in years or months.
Choose monthly or weekly instalments. NGO loans are usually repaid in 46 or 50 weekly instalments a year.
See the instalment and total interest for both methods, and the true yearly rate of the flat quote.
How it is calculated
Flat rate: interest = principal × rate × years. Principal plus this interest is split into equal instalments.
Reducing rate: each instalment pays interest only on the balance still owed. Instalment = P × r × (1+r)ⁿ ÷ [(1+r)ⁿ − 1], where r is the monthly rate and n the number of instalments.
Examples
Loan
Rate
Term
Flat interest
Reducing interest
True rate of flat
৳1,00,000
10%
1 year, monthly
৳10,000
৳5,499
about 18%
৳5,00,000
12%
5 years, monthly
৳3,00,000
৳1,67,333
over 20%
৳1,00,000
12.5%
1 year, 46 weekly
৳12,500
—
about 26.6%
Why it matters
The same “10%” can cost almost twice as much. When comparing offers, always ask for the rate on a reducing (declining-balance) basis and get the total interest in writing.
More: instalments and compulsory savings
Some NGOs require compulsory savings with every instalment, returned at the end. You have less money in hand while paying interest on the full loan, so the real cost is higher than the rate shown here. For weekly instalments, the weekly rate is multiplied by 52 to give the yearly rate.
Frequently asked questions
What is the difference between a flat rate and a reducing rate?
A flat rate charges interest on the full original loan for the whole term, even though you repay some of it with every instalment. A reducing rate charges interest only on what you still owe. So at the same quoted number, a flat rate costs close to twice as much.
What is 10% flat really worth?
On a one-year loan with monthly instalments, 10% flat equals about 18% on a reducing basis. The gap grows with the term: 12% flat over 5 years equals more than 20% a year reducing.
What do NGO weekly instalment loans really cost?
NGOs usually quote a flat “service charge”. At 12.5% flat with 46 weekly instalments, the true yearly rate is about 26.6%. Compulsory weekly savings raise the real cost further.
Which method do banks use?
Banks in Bangladesh normally charge term loans and home loans on a reducing (declining-balance) basis. Flat rates are common in microfinance, hire-purchase of goods and some personal loans. Always check whether the loan paper says flat or reducing.
How is the true yearly rate found?
We search for the reducing rate at which the same number of instalments, of the same size as the flat instalment, repays the loan exactly (the internal rate of return). That monthly or weekly rate is multiplied by the number of periods in a year.
Is there a cap on microfinance interest?
The Microcredit Regulatory Authority (MRA) caps the service charge of licensed institutions at 24% a year on a declining-balance basis. You can ask for the declining-balance rate in writing before borrowing.