What’s the Connection between Flat Rate of Interest and Reducing Balance Rate?
The rule of thumb is that monthly reducing balance rate is almost twice the flat rate but it is incorrect. In fact, there can be wide variation based on the period of loan and rate of interest. For example a flat rate of interest of 10% for a 3-yr loan period is equivalent to 17.92% reducing balance rate (i.e. around two times minus two percent). Now, if we increase the loan tenure from 3 years to 10 years, then 10% flat rate of interest converts to 15.86% monthly reducing balance rate (i.e., approximately double the flat rate less 4%).
