Flat rate or APR: why can the same number cost more?

In plain words

A flat rate charges interest on the full amount borrowed for the whole loan term, even as you repay it. A reducing-balance rate charges interest only on what you still owe. It is like paying for a full basket even after most items are gone. The mix-up is treating the same quoted rate as the same cost, but the flat rate costs far more.

You may meet this idea when comparing a loan offer with another loan offer. It can also appear in the details of a loan app or on a repayment schedule.

Two worked examples

£3,000 over 24 months at 6% flat: £360 of interest, £140 a month.

At 6% on the reducing balance: £132.96 a month, about £191 of interest.

The flat loan's true rate is an APR of about 12%.

Nigeria

₦240k over 12 months at 2.5% a month flat: ₦72k of interest, ₦26k a month.

At 2.5% a month on the reducing balance it would be ₦23,397 a month, ₦40,763 of interest.

The flat loan really costs about 4.3% a month.

The common mistake

A flat rate costs nearly double

The mistake: Comparing a flat rate with a reducing-balance rate as if the same number meant the same cost.

What’s true: Knowing the rate type shows the real cost of a loan, not just the quoted number.

A monthly rate times 12 hides the real cost

Some yearly rates are just the monthly rate times 12; others already count interest on interest. Two loans — or two savings offers — compare fairly only on what each adds up to over a full year. Knowing the full-year cost helps you spot when a loan costs more than its yearly-looking rate suggests. Missing interest on interest can leave you paying more than expected over the year.

2.5% a month can be quoted as 30% a year (2.5 × 12).

With interest charged on interest each month, a full year really costs ≈34%.

Japan

1.5% a month can be quoted as 18% a year (1.5 × 12).

With interest charged on interest each month, a full year really costs ≈20%.

Where you’ll meet it

Your money, or money you will owe?The checkout looks the same either way; what differs is whether the bill is already paid or still coming.
Fees turn small loans into big onesThe sticker rate is the advert; fees are the price — total cost is the only honest comparison.
Compounding bites both waysGrowth stacks on growth — the last years of compounding earn more than all the early ones combined.

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Education, not financial advice Source: Theorise lesson and coach text