1. Flat interest keeps using the original principal
Under a flat-rate method, interest is calculated using the starting principal for the agreed period even though repayments are happening.
Note: A flat 10% is not directly comparable with a reducing 10%.
2. Reducing balance uses what remains outstanding
As principal is repaid, the balance used to calculate future interest falls. This is the logic behind standard amortising reducing-balance loans.
Tip: Interest follows the debt still outstanding.
3. Compare using cash flows and APR
Ask for EMI, total repayment, fees and APR or effective annualised cost where disclosed. Headline percentages alone can mislead.
Tip: Compare cash flows, not labels.
4. Ask to see the amortisation schedule
Confirm whether the advertised rate is flat, reducing, fixed or floating and reconcile it with the repayment schedule before signing.
Note: A low-looking rate can hide an expensive structure.
5. Quick check
Two loans both advertise 10%, one flat and one reducing. Are they automatically the same cost?
Answer: B - The calculation methods differ, so compare total repayment and APR.