Flat Rate vs Reducing Balance: What Malaysians Should Really Know About Loan Interest
When comparing personal loans in Malaysia, you may notice that some banks advertise a flat interest rate while others refer to a reducing balance rate. At first glance, the numbers can look confusing — and sometimes misleading if not fully understood.
This article is for general educational purposes only and does not constitute financial advice.
What Is a Flat Interest Rate?
A flat interest rate calculates interest based on the original loan amount for the entire loan tenure. This means interest is charged on the full principal from start to finish, even though the outstanding balance decreases with each repayment.
For example, if you borrow RM10,000 at a 5% flat rate for 3 years, interest is calculated on the full RM10,000 for all 3 years — not on the reducing balance.
Flat rates may appear lower at first glance, but they do not reflect the effective cost of borrowing.
What Is a Reducing Balance Interest Rate?
A reducing balance interest rate calculates interest based on the remaining loan balance. As repayments reduce the principal, the interest charged gradually decreases.
This structure typically results in lower total interest paid compared to flat rate loans with similar headline rates.
Why Flat Rates Can Be Misleading
A 5% flat rate does not mean the loan costs 5% per year in effective terms. When converted into an effective rate, a 5% flat rate may be equivalent to a much higher reducing balance rate.
This is why reviewing total repayment amounts and understanding how interest is calculated is important.
Readers who want a deeper explanation of interest structures may find it helpful to review how personal loan interest rates work in Malaysia.
Comparing Total Repayment Instead of Just the Rate
Instead of focusing only on the advertised interest rate, borrowers may consider:
- Total repayment amount
- Monthly instalment amount
- Loan tenure
- Any additional fees or charges
A lower headline rate does not automatically mean a cheaper loan overall.
Loan Tenure Also Matters
Longer loan tenures may reduce monthly instalments but increase the total interest paid. Shorter tenures may increase monthly commitments but reduce overall borrowing costs.
Those reviewing affordability may also find it useful to read how to reduce monthly debt commitments in Malaysia before committing to a loan.
Reviewing General Loan Information
Some individuals choose to review general loan information to better understand repayment structures, eligibility considerations, and comparison factors.
For reference purposes, general personal loan information can be found on official personal loan comparison platforms.
Final Thoughts
Understanding the difference between flat rate and reducing balance loans may help Malaysians make clearer comparisons when evaluating borrowing options. Looking beyond the advertised rate and reviewing total repayment amounts supports more informed financial decisions.
Disclaimer: This article is for general information purposes only and does not constitute financial, legal, or investment advice.